Who's Doing the Buying? (Rosenberg)

WHO’S DOING THE BUYING?

by David Rosenberg, Chief Market Economist, Gluskin Sheff

Good question.

We know it’s not the retail investor/private client … they have been selling into this entire bear market rally and rebalancing their asset mix in favour of income.
It’s not the mutual funds because institutional PMs already have cycle-low cash ratios (at 3½%).
There would seem to be three principal buyers right now:

1. Pension funds: There was an article in yesterday’s WSJ (page A9) titled Cities Hide Pension Liabilities, Study Says.” The latest estimate of unfunded pension liabilities for municipalities is $574 billion and for state governments it is $3 trillion. Believe it or not, but “most” are using assumed rates of return of 8%, which is actually more than what you can get on a generic B-rated corporate bond right now. So, this means that there must be a huge rebalancing going on right now in the pension fund industry that is acting as a major source of fund-flow support for equities.

2. Hedge funds: As Bob Farrell recently pointed out, the hedge funds woefully lagged behind in September, with a 3.5% gain compared to a 9% advance for the overall market. There is plenty of anecdotal evidence that the hedgies are allocating funds towards the equity market. No sense disputing that.

3. The proprietary trading desks at the big commercial banks. Look at the chart below from the weekly Fed data — bank-wide trading assets have soared $50 billion alone in the past month.

The VIX, Alcoa, and Bob Farrell

Page C7 of yesterday’s WSJ discusses the VIX index, which has broken below the 20 level now for three days running, as a possible sign of complacency. It probably is — we have only seen a sub-20 reading on the VIX a mere 14% of time since the stock market peaked in October 2007, so this is not an usual development. But even though the VIX index is at 19.07, the lessons of the last two forays below 20 suggest that it has yet to hit an extreme low just yet.

It dipped below 20 on February 26th of this year and went as low as 16.6x on February 3rd and during that time we had a 10% gain in the S&P 500. It was at that 16.6x threshold that the selling started because we then endured a 16% correction to the July lows. Go back before then to December 22, 2009 and the VIX broke below 20 and then went as low as 17.6 on January 19th — during which the S&P 500 advanced 3%. It then went for an 8% setback in the next few weeks.

Message: the VIX below 20 is something new here, but if the past two episodes this year are any indication, the best way to play it is to wait for the break below 18 or 17 before taking chips off the table.
The WSJ (same page as above) makes much of the “gold cross” (the 50-day on the Dow breaking above the 200-day) though the “death cross” (in reverse) during the summer did not exactly trigger the expected plunge as was expected back then. However, the article does contain a good tidbit of information in terms of trading from the long side (for now). When Alcoa’s stock rises the day after its earnings release, the overall market rises 80% of the time in the next 10 sessions. And when Alcoa’s stock declines the day after its results, the market only manages to advance 38% of the time. I guess that’s why as ‘old economy’ as it is, it’s viewed as a bellwether — at least for a trade.

The one fly in the ointment is the Investors Intelligence Poll, which does limit but not prevent upside potential. Bob Farrell is not ready to call an end to the secular bear market but does say that the break of resistance has been critical, not to mention doing so on days when the economic data were poor. His biggest near-term concern is a possible countertrend reversal in the U.S. dollar — he views that as the most pronounced risk for a market correction.

A REASON TO BE CAUTIOUS ON THE EQUITY MARKET

Investors Intelligence poll just came out and the results:

Bulls: 47.2% versus 45.6% last week
Bears: 24.7% versus 28.3% last week

The bull/bear spread now stands at 22.5. This ratio has not been this “wide” since May 11. Bullish sentiment has risen for 7 consecutive weeks (and is up 17.8 points since the end of August). Reasons to be cautious (for those who play it from the long side).

Copyright (c) Gluskin Sheff

This article is excerpted from 'Breakfast with Dave,' October 14, 2010. (free worthwhile registration required)

Total
0
Shares
Previous Article

Bernanke’s Conflict of Interest

Next Article

“Better Lucky than Smart”: The Urban Legend of Warren Buffett

Related Posts
Subscribe to AdvisorAnalyst.com notifications
Watch. Listen. Read. Raise your average.