Mark Mihal got the surprise of a lifetime when he fell into a sinkhole on the 14th hole of a golf course in southern Illinois. His buddies couldn’t find the right ladder, but they got him out okay using a rope. He fell 18 feet. (Source: Suhr, J., “Mo. Golfer survives fall into III. course sinkhole,” Associated Press, March 13, 2013.) That’s one heck of a divot, and not quite the hole-in-one he was hoping for.
Mihal’s description could be considered famous last words for this stock market: “It didn’t look unstable, then I was gone.” (Source: Ibid.) It’s pretty hard to believe the stock market’s gains, although a paper gain is better than nothing. The run-up is a momentum play from institutional investors before the real news hits. “Buy on rumor, sell on news,” goes the old adage.
It is true that bull markets typically start with a bang. Sentiment changes on a dime, and institutional investors start buying. The Dow Jones Transportation Average experienced a powerful stock market breakout in December. A typical bull market indicator? Absolutely, but highly suspect.
Alaska Air Group, Inc. (NYSE/ALK) has been bid 25 points by institutional investors since last October, which is pretty spectacular. Fourth-quarter earnings matched Wall Street expectations, but the numbers weren’t that great. Alaska Air’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
The stock market’s gains since last December aren’t about asset rotation from bonds to the stock market. They’re more about pent-up demand from institutional investors who have nowhere left to go. The bond trade is over, the commodity price cycle is on a break, and currencies are out. The only other asset class is real estate (The Blackstone Group L.P. [NYSE/BX] is buying rental real estate in Florida like crazy).
There’s been remarkable consistency in the stock market’s upside since the financial crisis, demonstrating the appetite institutional investors have to be buyers. The Federal Reserve has executed perfectly—for Wall Street.
The mini recovery bull market is still intact and in much need of a correction. The major stock market indices are now all well above their 50-day moving averages (MAs). The NASDAQ Composite toyed with its 50-day MA during the last week in February, but it’s now well above it. Institutional investors are buying, but they are buying safer names.
This upside is striking, given current fundamentals, and while the outperformance of the Dow Jones Industrials is a nod to old economy stocks, many large corporations are struggling to grow their earnings due to problems in Europe.
The whole thing is very out of whack; but then again, institutional investors are paid to play. This isn’t about Main Street. It doesn’t pay to fight the Fed, at least not yet. And institutional investors don’t want to look like they’re underperforming.
The long-term chart of the S&P 500 is so ominous, being three massive bull markets over the last 20 years, peppered with two massive declines. The next move? I am taken aback by the stock market’s recent action. I won’t fight the Fed, so I wouldn’t say sell. Many large corporations have excellent balance sheets and are fairly valued. The stock market is a near-term hold until some kind of shock occurs. It’s up so high now that institutional investors will take profits on any good first-quarter earnings.