Okay, so yesterday, I wrote that if the Dow crossed the 17,000 barrier today, the market would be off to the races, more or less. Well, unless we see a reversal of sentiment today, it appears the Dow will not cross that barrier.
- After U.S. gross domestic product contracted in the first quarter for the first time in three years, investors are cautious.
Admittedly, so far this year the investment crowd has shown tentativeness about pushing the market higher, even as it has pushed the market higher. Understandable, as the economic data from the winter came in less-than-stellar. Yet, whenever a positive catalyst appears, the market seems to run with it.
- The Dow and S&P 500 ended at record highs again on Monday as more deal news raised enthusiasm for stocks, though Wall Street’s fear gauge advanced.
Mergers and acquisitions are generally a good sign in the market. They speak to corporate consolidation and accretion, and they demonstrate that chunks of the big cash that has been in the corporate coffers for years now is finally getting spent, which the market likes.
- US. stocks edged lower on Tuesday, as a lack of buying catalysts was evident with the Dow and S&P 500 just below their most recent record highs.
Yet, when the market approaches a milestone, such as 1900 in the S&P 500 just last week or DOW 17,000 this week, it balks, ruminates, and then churns a bit before taking the leap. So far in 2014, this has been the modus operandi.
- This year, the 50 stocks in the S&P 500 with the lowest beta scores – a group that includes ConEd and McDonald’s – are up on average by 12 percent. Meanwhile, the 50 highest beta stocks, which include Citigroup and Best Buy, are up an average of 7 percent.
The above speaks to boring, for sure, but it also speaks to a conservative approach to a climbing market. Volatile stocks are out and staid stocks are in. Yet and still, even a conservative approach such as buying up boring large caps still says that investors are willing to take some risk to stay in the market, even if that risk is about dividends and not growth.
True, it is a change from last year in the market, when risk-on was the path to a much higher return than this year’s return on the S&P 500.
- In 2013, the 50 highest-beta S&P 500 stocks rose an average of 51.4 percent, compared with 21.3 percent for the 50 lowest-beta stocks.
So where are we now? What is the market doing today and what will it do tomorrow (figuratively speaking)? My guess is more of the same, although the bears are betting on a big correction, again.
- Bloomberg reported Monday that shorts on the SPY have reached nearly 11 percent of the shares outstanding, which is the highest proportion of short sales to shares outstanding since 2012. Oh, and bets against the XLK (Technology Select SPDR) are now 67 percent above the average seen over the last 12 months.
If the bulls stay convicted, even if the conviction is weak, the market will probably churn higher in small bites, as it has done recently. But, if the bears lack conviction, and the bulls take charge, all those shorts could come back to haunt the bears, meaning a short squeeze and the market goes higher, much higher. The bears capitulating would mean a sharp climb up.
- A shallow decline without a lot of conviction on the downside would be a signal to the bulls that it’s time to BTFD again.
Then again, as we all know the market always has at least two options, and in this case, the second option is that if the bulls lose conviction and let the bears take advantage of all those shorts, well, then the market will take a turn in another direction.
- However, if the bears can come up with a raison d’être and create a nasty spill in the indices, the game could easily play out differently.
So far today, the bears seem to lack conviction and the bulls are still tentative around the 17,000 mark on the Dow, and it appears the bulls are not all that steady at the new lofty height of the S&P.
For now, it appears churning is where we are in the market. Tomorrow (again figuratively speaking)? Well, I guess we just wait and see, as always, but, in the meantime, consider all that money in boring stocks could rotate out, if the bulls show some conviction and push the bears into a short squeeze. It could happen just like that, which is a snap of the finger.
Trade in the day; invest in your life …
