A conspiracy theory? Seems the rally still has legs.
VAMPIRE MOVIES, CHURCH ATTENDANCE, conspiracy theories -- such things tend to become more popular in times of social unease and economic discomfort.
One conspiracy theory gaining undeserved traction on Wall Street lately holds that the Federal Reserve or another government entity might -- or must -- have been a buyer of stocks or stock futures during the run higher off the March lows.
A report by fund-flow research firm TrimTabs Investment Research a couple of weeks ago intensified the usual conspiracy chatter in the blogosphere and across trading desks, suggesting the Fed might be goosing stocks because publicly observable fund flows (via mutual funds, corporate buyback plans and insiders) seem not to be able to account for the 70% gain since the March bottom. Aside from the observation that theories that assign blame to unseen forces are inherently the laziest of all possible explanations, there are many problems with this assertion.
Fund flows don't capture changes in positioning by hedge funds, mutual funds, pension funds, individual stock buyers, foreign capital and others. The fact that long-short hedge funds outperformed the Standard & Poor's 500 both into the lows last year and for all of 2009 shows hedge funds went from substantially hedged/short in the deleveraging phase to very long.
More broadly, why would the Fed have to buy stocks, with all it has openly done to penalize risk aversion by adding reserves to the banking system, setting short rates at zero and buying credit products and Treasuries? The whole asset spectrum has fed off these initiatives.
Perhaps as interesting as the debate over such notions is what their popularity says about the still-high level of market skepticism.
SPEAKING OF SKEPTICISM, THIS quote was surfaced by Laszlo Birinyi of Birinyi Associates: "The prospect that the recovery may amount to nothing more than a few quarters of paltry growth -- and possibly not even that -- is gaining credence among economists and the public at large."
It comes from a New York Times article published in the fall of 1982, when the market had bottomed but the economy still looked crippled. Birinyi points out that the trajectory of the surge since March looks most like the sanctified run off the 1982 lows.
Let's get to the massive fundamental differences between now and 1982, which Birinyi concedes. Then, stocks were cheap, and now they aren't. Rates and inflation were high and about to collapse, and now are quite low. Yet there is now, as then, a reluctance to take at face value the leading indicators suggesting a vigorous rebound in economic activity.
The pressing question is whether the market has fully built in the kind of powerful rebound in domestic economic data that most people refuse to predict. This is the case that Morgan Stanley strategist Jason Todd made last week in a report plotting the S&P against the leading indicators, which suggests stocks have gotten to a point where anything but rapid growth would make the market vulnerable.
Yet there is always the chance that a buy-on-the-news response kicks in, should the public's caution be refuted by the earnings, employment and production numbers to come.
Michael Shaoul, CEO of brokerage Oscar Gruss and chairman of the impressive Marketfield Fund (ticker: MFLDX), which returned 18.5% from its July 2007 inception through Dec. 31, 2009, compared with an 18.9% loss in the S&P 500, says: "We think until people embrace the idea generally that this recovery will look V-shaped, there is still upside to the market, though not as much" as we have already seen.
In some sense, to be resolutely bullish now amounts to betting on the kind of upside overshoot that usually punctuates strong rallies.
Ned Davis of Ned Davis Research, who has been in synch with the tape but watchful of excessive valuation and sentiment risks, wrote last week that his own sentiment measure shows "the crowd is finally throwing in the bearish towel and starting to believe the better economic news. However, crowd psychology often acts as a pendulum with extremes in one direction matched by extremes in the opposite direction....I am not certain we have matched the record pessimism seen from November 2008 to March 2009."
He continues a "mostly bullish" trading strategy based on not fighting the Fed or the tape, but is selling call options as a "hedge against excessive optimism."