Since most investors came into the year quite bearish due to the fiscal cliff debacle, the market’s sudden move up has been perceived as a very frustrating rally. Fund data show that both individuals and institutions pulled a lot of money out of the market last year as they perceived a great deal of danger.
So, as equity and credit markets have risen sharply this year, investors face a new problem — and that is the danger of not being long enough amid a sensational rally.
People, of course, feel that they pulled money out of the market for a good reason. The fundamentals of the U.S. and European economies are lousy, jobs are hard to get, consumer spending growth is weak and earnings are peaking. Investors know all this and this has naturally made them wary of stocks.
But these issues were all mostly true last year as well, and yet the S&P 500 was up 14% with dividends, and European stocks more than that.
So, with stocks surging again after the weak December, investors who are not invested enough have a terrible sense of déjà vu. They feel the train is leaving the station. They don’t know why the train is leaving but clearly, wow — there it goes — steaming away.
So, let me just tell you that the reason is very simple. U.S. and European earnings are indeed peaking and the economies are soft. But stocks are going up because the super-strong bond market has allowed companies to issue debt at incredibly low yields. And they have taken the proceeds from those bond sales and repurchased their own stock.
Now, you might think this might not make much of a difference, but it does. Corporate buybacks have been so incredibly strong that they essentially counteracted all of the selling of bearish institutions and individuals, and then some. It’s as if the market is a pail of water with a hole on the bottom that never drains out because more money keeps pouring in from buybacks.
This remarkable situation has bearish investors tearing their hair out looking for the best stocks of 2013 as they face the need to both cover their wrong way short sells as well as chase stocks higher. We have seen this happen many times before in the past decade, including most of 2003, most of 2009 and in the wake of the big decline in the summer of 2011.
Traders need to keep a cool head during these spans and continue to trade the pullbacks rather than to simply chase breakouts. A few of those that I am seeing this week include chemical maker Grace (NYSE:GRA) and oil refiner HollyFrontier (NYSE:HFC). Both have paused within well-documented uptrends, and are likely to resume their torrid advances soon.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
Professional traders and hedge funds make huge profits off volatility. Now, Jon’s service CounterPoint Options levels the playing field with the first service geared towards helping individual traders make steady, consistent profits with the VIX. Get more information on Trader’s Advantage and CounterPoint Options today.