Hedge Funds Scrambling After Years of Under-Performing

George Brooks |

NYSE Wall StreetThe stock market started the year off on a solid note, primarily due to relief that Congress voted to postpone sequestration and continue the Bush-era tax cuts for most earners, as well as other financial incentives.
I warned of decline in stock prices in early 2013, because I expect an ugly fight in Washington over raising the debt ceiling and deciding where to cut spending.
To-date, the Street is not concerned that a huge clash in political ideologies starting next month will adversely impact the stock market.
Instead it is buoyed by statements out of Europe over the weekend that the worst of the three-year sovereign debt crisis is over and the focus can now turn to reviving economic growth.
Then too, since there is nowhere else to invest, institutions are putting clients’ cash to work in the stock market, assured that the U.S. economic recovery is once again gaining traction.
Reportedly, hedge funds are borrowing more to buy stocks, as margin loans by NYSE brokers have advanced to four-year highs, both viewed as a vote of confidence (!).
Q4 earnings, accompanied by analyst’s projections for 2013 and the year after, are starting to flow, as I write.
Unless I am wrong about the magnitude of the divisiveness in Congress and between it and the White House in coming months, it would be wise to hold some cash reserves.
I scanned hundreds of leading stocks over the weekend, and most are reflecting buying. That’s hard to resist.
In situations like this where an investor wants to buy, but risks are above average, one tactic would be to buy part of the total number of shares you want to own. It can be added to at lower or higher prices when justified. That way, you increase chances of making money, but hedge your risk.
This looks like one of those situations.

DJIA: 13,488.43
S&P 500: 1,472.05
Nasdaq Comp.: 3.125.63
Russell 2000: 880.77
Monday, January 14, 2013 (9:15 a.m.)
This is a head game, one where emotions rule, often to one’s detriment - temptation is to bet the ranch at the top and dump it all at the bottom.
The temptation is greatest when it looks like the market is going to run away from you. I have referred to down markets reaching the “ouch” point where investors begin to think of bailing out. Then there’s the “I can’t stand it anymore” point where investors sell it all, never to buy another stock.
Well, that can work in reverse. Investors with cash can watch a market rise consistently and reach the I can’t stand it point and make the big plunge – “in for a dime, in for a dollar !” - just in time for a correction, or bear market.
TODAY: I am raising near-term resistance to DJIA 13,568 (S&P 500: 1,475). Support is DJIA: 13,396 (S&P 500: 1,461)
DEBT CEILING
The nation has a need for an increase in the nation’s debt ceiling in order to pay bills already approved and contracted for. Until the summer of 2011, it was a ho-hummer, with 8 approved raises over the last 10 years, 85 over the last 100 years.
However, hostilities in Congress got so ugly in 2011, the DJIA tumbled 12% in7 days following a decision to raise the debt limit. S&P lowered its credit rating for the U.S. government.
I see no reason why we won’t get round two in February/March. We reached the debt limit on January 2, but the Treasury has enough wiggle room to buy a couple month’s time.
A POSITIVE NOTE:
While I am bearish about the early months of 2013, the year can produce a lot of attractive opportunities, just at lower prices.
The U.S. economy has recovered from the worst recession/bear market since the 1930s. We survived, and that is huge.
Housing is in recovery mode, increasing homeowners’ “wealth effect,” corporations are flush with cash and hopefully the 113th Congress can resolve key spending issues, setting the stage for a sustainable recovery beyond the current one.
Signs of an economic recovery are surfacing in China with some forecasters becoming more optimistic about Europe’s stabilization and return to growth.
I see an interruption to the bull market in coming months that started in March 2009, but which has not fully run its course. Individual investors are largely absent, but they will return to buy near the end of the bull market when speculation ramps up. That can be a year or two out.
BOND MARKET:
I was premature in my earlier forecast that the long-term bond bubble would burst, but now feel it has already begun with a top traced out between July and December. U.S. Governments were in demand as a refuge from international chaos. As the tensions from European sovereign debt woes abate, money will flow out of safe havens and into stocks where a better return is hoped for. The short-term bonds are obviously not the problem, but long-term bonds are vulnerable.
APPLE (AAPL: $520.30) At a Tipping Point ?
Last Wednesday, I noted that AAPL was at a “tipping point,” that a break above $555, or below $500 was imminent. We may get the answer today and based on pre-market trading, it looks like a big test of $500.
There has been a persistent seller for four months. The $510 level has attracted enough buyers to trigger a “bounce,” but that level is in jeopardy today. Its earnings are scheduled for release on Wednesday, Jan. 23.
I do not own, nor am I short Apple’s stock.
FACEBOOK (FB - $31.72): Classic break out and run situation. Support now $29.50. No change from Friday.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21. I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38. I’ll continue technical coverage for a while to accommodate readers.
As for Apple, well it is a big-name stock that got shellacked in a short period of time, I wanted to help out targeting a bottom as with FB. I don’t have a position in the stock, long or short.
ECONOMY:
Note: I am going to list the economic reports will not include the numbers from the last report, since those numbers are often revised significantly and therefore potentially misleading.
I suggest you access the website: www.mam.econoday for details reports on this week’s calendar and an excellent recap (plus graphs) of last week’s reports.
TUESDAY:
Producer Price Index (8:30)
Retail Sales (8:30)
Empire State Mfg Svy (8:30)
WEDNESDAY:
Consumer Price Ix.(8:30)
Industrial Production (9:15)
Housing Market Ix. (10:00)
Beige Book (2:00) Fed report on Jan 29-30 meeting.
THURSDAY:
Jobless Claims (8:30)
Housing Starts (8:30)
Philly Fed Svy (10:00)
FRIDAY:
Consumer Sentiment (9:55)
George Brooks
“Investor’s first read – an edge before the open”
sensiblesleuth@gmail.com

……………………………………………..
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.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GFI Gold Fields Limited American Depositary Shares 3.16 0.07 2.27 4,912,461

Comments

Emerging Growth

Altair Resources Inc.

Altair Resources Inc, formerly Altair Gold Inc acquires, explores and develops mineral properties in Canada. The Company is in the process of exploring its mineral properties.

Private Markets

Ozobot by Evollve Inc

Ozobot is a world leader in compact super intelligent robots that entertain and educate through fun interactive gaming.

Pinterest

Pinterest is a visual discovery and planning tool. Users ("Pinners") use the site and apps to get ideas for their future, such as recipes, places to travel, and products to…