Investor’s first read – Brooksie’s edge before the open
Tuesday, March 27, 2012 9:04 a.m. ET
DJIA: 13,241.63 S&P 500: 1416.51
TODAY: There are ready buyers on even small pullbacks in stocks. Institutions and hedge funds are under pressure to buy, but stocks keep running away from them. They are forced to pay-up for stocks in order to gain a position.
Normally, I’d say support for the DJIA today is 13,180 (S&P 500: 1409), but buyers may not let that happen. The S&P 500, Nasdaq Composite and Russell 2000 broke above March highs yesterday. Excitement about stocks is escalating. While not yet at a “fever” pitch, the lure to BUY is picking up steam.
Again, I feel it is necessary to say:
There is a huge amount of cash sitting in “safe” havens where yields are next to nothing, certainly not enough to offset the increase in the cost of living.
Those positions were justified when the risk of an international meltdown was real.
If the perception that that risk has passed, that money will come out and go into stocks.
I have repeatedly referred to this as the “Big story of 2012.” Without a return of a risk of contagion, it will happen.
Interest rates are too low. The bull market in long-term bonds has most likely topped out, not to return to these lofty levels for years.
INVESTING – A HEAD GAME !
It has been said that successful investing is a “head game.” If “emotions” (normal human behavior) is included in that definition, I’ll agree.
What could play with the head and emotions more than to have missed getting on board in this bull market ?
That goes double, triple, or more if you got pummeled by the bear market, bailed out and are now wondering how you will ever get back to where you were before the bear market began.
At some point, these investors will return and their buying will mark a “top,” much like their desperate selling marked a bottom a bit more than three years ago.
At extremes, human emotions tend to overwhelm investors. At bottoms fear (and the need for just one good night’s sleep) forces investors to bail out, never to buy another stock again.
At market tops, greed rules. Everyone seems to be making easy money in stocks, so why not me ? And, let’s not stop now !
I suspect individuals are not alone on the sidelines, that there are money managers with a ton of cash there also. We are now seeing evidence that hedge funds have begun to convert bearish strategies to bullish ones.
Investors had good reason to fear a market crash on two occasions. One during the 2007 – 2009 bear market and two, during the touch-and-go European sovereign debt crisis, which hasn’t totally vanished.
If you are managing money for someone else, you simply cannot roll the dice during these crises as much as you recognize values and want to buy in.
The threat of a European financial crisis chased a lot of money to the sidelines where it sat in treasuries, money markets, CDs, etc.. satisfied with safety though not getting a decent return.
If the perception that the risk of an international meltdown has passed , that money is coming out of “safe” havens and will go into stocks, pushing prices higher and higher.
Stocks will become more and more overvalued as the bull market thunders ahead. Buyers will be investing in over valued situations expecting to sell out at higher prices where stocks are even more over valued. It’s happened before, it’s called the greater fool theory where a person foolishly buys a stock with the intention of selling it to a greater fool at a higher price.
Unless some huge adversity harpoons this bull market before it runs its normal course, we will see excesses like this all over again. Corrections can be expected along the way, but big money will be made late in the bull market and in worthless stocks sporting an exciting “story.”
Step back and do an honest appraisal of your own emotional state.
Don’t want to check prices this morning, don’t care to hear about a good stock ?
Buy ? No way ! Everyone I talk to is losing their favorite shirt, just look at the headlines, we’re headed for a crash.
Probably near a buying juncture.
Can’t wait for the market to open. Let’s see, maybe I should move some money over from the savings account, better yet maybe I can max out the cc, buy several of these great tips I have been getting, pay it back later.
Market is topping out.
ECONOMIC REPORTS:
MONDAY: Pending Home Sales Index (10 a.m.) – a leading indicator to housing activity. Dipped 0.5% in February to 96.5% from 97.0 in January, but 9.2% ahead of a year ago. “An uneven but higher sales pattern”: Lawrence Yun, National Ass’n Realtors.
TUESDAY:
S&P Case Shiller Home price Index (9 a.m.) – tracks monthly changes in residential real estate in 20 metropolitan regions. The December index fell 0.5% after a drop of 0.7% in November.
Consumer Confidence ( 10 a.m.) –Based on consumer perceptions of business and employment conditions , as well as six months hence. February’s index jumped 9.3 points to 70.8 well above the recession low of 25.3.
WEDNESDAY:
MBA Purchase Applications (7 a.m.) Applications for mortgages. It is a leading indicator for single family home sales and new home construction.
Durable Goods (8:30 a.m.) Declined 3.7% in January following a revised 3.3% rise in December.
THURSDAY:
GDP (8:30 a.m.) – Last estimate for Q4 was plus 3.0%
Jobless Claims (8:30) Dropped 5,000 for week ended March 17 bringing the 4-week moving average down to 355,000.
FRIDAY:
Personal Income and Outlays (8:30 a.m.) Increased 0.3% in January after a 0.5% gain in December. Nice gain expected in February report.
Chicago PMI (9:45 a.m.) Purchase managers survey of regional business conditions. Rose 3.8 points (6%) to 64 in February. New orders index jumped 8.8% a good omen for this week’s report.
Consumer Sentiment (9:55 a.m.) a survey of 500 households regarding financial conditions and attitudes about the econo9my. Slipped 1.0% in a preliminary March survey.
George Brooks
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The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
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