Market becomes harder to shock
Nine weeks ago, the stock market couldn’t find a single thing to be hopeful about.
Now, seemingly nothing can upset it.
Chrysler in bankruptcy? No surprise there. Possible global flu pandemic? The authorities will handle it. The economy shrank at a 6.1% annual rate last quarter? Ancient history!
Blue-chip stock indexes this week rose for the seventh week of the last eight, with the Dow Jones industrial average adding 44.29 points, or 0.5%, to 8,212.41 on Friday.
The Dow is up 25.4% from its 12-year low March 9. Many broader market indexes have racked up bigger advances. The technology-heavy Nasdaq composite is up 35.5% after eight consecutive weekly gains.
As investors look at their own portfolios, the numbers probably will inspire relief -- and suspicion.
Relief, because most or all of the market’s deep 2009 losses as of early March have been recouped. The benchmark Standard & Poor’s 500 index was down 25% for the year at its low. It has pared that decline to less than 3% (although that doesn’t make a dent in last year’s 38.5% loss).
Suspicion, because of the possibility that this could just be a trap -- another rally aimed at sucking in average investors so Wall Street sharpies can sell to them, then take the whole thing down again in a hurry.
Joe Saluzzi, a veteran trader at Themis Trading in Chatham, N.J., worries about who’s driving this surge in share prices.
“The problem is that this now is a momentum market,” he says.
“The money coming in is from aggressive traders, not the buy-and-hold investor.”
Momentum traders don’t care which way the market is moving, Saluzzi notes; they’ve been buying over the last eight weeks because the trend has been up, but they’ll be “shorting” stocks as soon as the trend reverses.
And when it does, “I see nothing to tell me that we aren’t going to retest the market lows of March, or even go lower than that,” he said.
If there’s another market meltdown on the horizon, the damage to investor psychology would be massive. Another huge group of buy-and-hold investors probably would exit the stock market forever, unable to stomach the possibility of even heavier losses.
Those who stayed would face a market even more at risk of manipulation, legal or otherwise, by traders.
Of course, these fears are standard during and immediately after any severe bear market. People come to doubt that any rebound in share prices can stick.
But that also can feed a new bull market as greed slowly overcomes fear and buyers trickle in from the sidelines.
Even if Saluzzi is right about professional traders dominating in the market’s turnaround since March 9, there are signs of renewed interest from other investors as well.
Stock mutual funds, which hold about $3.3 trillion in assets, saw net cash inflows averaging $3.3 billion a week in the first three weeks of April, industry data show. That isn’t much, but it’s a big reversal from the $27.5-billion outflow for all of March.
The assumption is that much of the money coming into funds would like to stay awhile, but there’s no way to know that for sure. These fund investors, too, may just be looking for a fast buck. Still, if pullbacks in prices are quickly met by new buying -- the pattern of the last eight weeks -- short-term money might become a lot stickier.
Market bulls say the underpinnings of the spring rally are solid enough to keep it from collapsing. They note that much of the U.S. economic data in recent weeks point to a potential bottoming of the recession. Because the stock market is supposed to look ahead, not behind, it’s signaling that if things have stopped getting worse, at some point in the second half of the year they might actually begin to improve.
As for the intensity of the rebound in share prices, the percentage gains aren’t that dramatic if you figure that the market was priced for Armageddon nine weeks ago.
The bullish case is that many stocks still are cheap relative to companies’ future earnings potential -- even in a modest 2010 recovery.
Steve Leuthold, head of money manager Leuthold Group in Minneapolis, thinks the S&P; 500 index could reach 1,100 by year’s end. That would be a 25% gain from here but still would be a long way from the index’s all-time high of 1,565 reached in October 2007.
Precisely because so many traumatized investors are sitting in cash and waiting for something worse to happen to the market, the real surprise would be if it didn’t, said Andy Engel, a senior analyst at Leuthold.
“Because of the money on the sidelines and the negative sentiment, it seems to us that there’s a lot more room for upside here,” he said.
That also may be true simply because it’s getting harder to shock investors, given what they’ve been through over the last 18 months.
For now, markets are betting that staving off a flu pandemic should be an easier task than governments faced in keeping the global financial system from collapsing.
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