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Who's Buying and Selling This Rally?

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With the Fed determined to inflate the markets, check out who the principal buyers have been in this run up.

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The stock market has moved sharply higher since August 27, when Fed Chairman Ben Bernanke suggested that the Fed might consider another bond purchase program, a maneuver known as quantitative easing.

The point of the program is to prop up the fragile economy by keeping long term interest rates low and encourage borrowing and spending by consumers and companies.

Specifically, the Fed Head said: "The Federal Reserve is already supporting the economic recovery by maintaining an extraordinarily accommodative monetary policy, using multiple tools. Should further action prove necessary, policy options are available to provide additional stimulus."

Investors, believing the Fed can come to the rescue, have responded: citing exchange-traded funds as indicators, the SPDR S&P 500 ETF (SPY), which includes holdings like Exxon (XOM), Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Bank of America (BAC), is up 9.5% since August 27.

Strategists ask the following question, however: just who has been doing the buying?

We know it's not you and your neighbors. The general investing public has continued to largely side-step stocks in their own background. Burned by two bear markets, and a stock market that has gone nowhere in 10 years, retail investors have been tough to lure back into the U.S. equity market.

Sine the beginning of September, they have dedicated just $1.91 billion to U.S. equity funds, according to EPFR. Year-to-date, they have yanked out $54.1 billion.

The principal buyers, say strategists, have included a couple of well-heeled groups of money-makers. First, there are the hedge funds. In September, hedgies reportedly turned in their best performance in 16 months with a 3.5% gain. However, that still undershot a 9% advance for the overall market.

There are therefore reasons to believe that the so-called "smart money" in fact missed the big September move in the market, which might have been dominated instead by the sovereign wealth funds like the kinds operated by the governments of Singapore and Kuwait. However, hedge fund managers are paid for performance and they cannot allow a headline-making advance to happen without them. So they're now buying in order to play catch up and meet their performance bogeys, says Jon Markman of Markman Capital Insight.

A second big buyer in the stock market, says Gluskin Sheff's David Rosenberg, would be the proprietary trading desks at the big commercials banks. These are traders that invest their firms' capital. As Rosenberg recently noted, using weekly Fed data, bank-wide trading assets have soared $50 billion alone in the past month.

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No positions in stocks mentioned.
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