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Talking points


I want to address three issues that are clearly on the top of everyone's mind relative to the recent market action;

Positive Divergences.

In the past I have mentioned a couple of times that if the market began an intermediate-term rally like the ones last July and October, it would be without the indicators reaching deeply enough into oversold territory. This can be considered a good thing, because it would mean indicators got less negative despite poor price action. While this could be true right now, I am not urging my clients with an investment time horizon, to sell. I am saying, "wait to buy" because you don't know until well after the fact that a positive divergence has taken place. Each major decline last year had the same "positive divergence" commentary before that final leg down that lined up the indicators. In addition, when everyone is looking for it, positive divergence rarely happens.

For example, I have received a bunch of emails referring to the reverse head and shoulders formation (bullish) on the indices. These came despite being more than 10% from the breakout point confirming the pattern. It would take a move above 945 on the S&P 500 to confirm it. Sure it could happen, but to proclaim or invest off of it now is more pure speculation than reality based.

Asset Allocation Switches (thanks Adam)

Many watched yesterday as the market spiked higher (as bonds got blasted) and proclaimed huge "asset allocation" programs were being kicked off. While a fund or two may have actually executed such a strategy, the way it works for most pension and big money funds is that a decision to change percentages has to go through the "investment committee" and then if a decision to act is made, a wide variety of funds receive the new allocation over time - NOT because stocks are down, the dollar is strong and bonds are weak.

Asset allocation is not an event; it is a long process that has been underway for the last year. As I said, I large macro fund can always do it and influence the market, but to say that it is the reason for a sustainable market rally, just look back at every time it has been mentioned over the past year and ask yourself if the market is up or down from that point. What really drives the market is talk of asset allocation switches vs. real time switches.

The Next Big Buyer

This is the main point that I want to reinforce. Every time I think I am being too cautious, I ask myself who the next big buyer is going to be. I was on a show with a guy (very smart too) who manages over $2 billion of equity money. He recently went from 13% cash in February to 5% now. That is a pretty dramatic shift and puts him with the average fund, which from what I read has a cash position of 4.5%. So I asked him, "if everyone is at 5%, and we agree the individual investor is out of the market, who is going to buy now to drive stocks sustainably higher?"

The answer I have heard is if the individuals who recently put their money in bond funds from stock funds decide to reverse their decision. That would mean asset allocation switches at the individual level and replenish the cash as a percentage of assets in equity mutual funds. I find that hard to imagine given that so much pain is so fresh in everyone's memory. They may move out of bonds in times of weakness, but to argue that Wall Street can convince investors with a high level of risk aversion that now is the right time - AGAIN. The truth is that it may well be the right time, but in order to get higher prices, you need to find buyers, not just a good reason to buy.
Thanks for the feedback this week folks, it is great to be a minyan!
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