While market watchers are delighted that the S&P 500 has climbed 62% from its March 9 low — and is up more than 20% for the year — many find the gains difficult to understand or explain.
“This is bizarre, and I'm trying to figure it out,” said John Buckingham, chief investment officer at Al Frank Asset Management Inc.
“We're in the camp that thinks we're long overdue for some sort of a pullback, yet the stock market continues to climb the wall of worry,” added Mr. Buckingham, who manages $460 million.
Watching the stock market soar above a sluggish economy that shows scant evidence of major improvement, money managers are finding themselves at odds with their own better judgment.
Citing as an example the rash of “whisper numbers,” or rumors, that have been driving up stock prices in advance of corporate-earnings reports, Uri Landesman, head of global growth at ING Investment Management Americas, said the market is looking for anything that feels positive.
“The preponderance of whisper numbers is the highest I've seen since the late "90s. We're back to that kind of market, because I think everyone is willing to conclude that the world is not coming to an end,” said Mr. Landesman, who manages $1.7 billion in large-cap-growth portfolios.
“There does seem to be something unorthodox about all this,” he added. “But you ignore it at your own peril.”
Justifying the historic eight-month rally is sometimes only a matter of considering the dramatic nature of last year's crash and the 57% drop from the October 2007 peak to March of this year.
“You have to remember that we're coming out of a really deep hole,” said Sam Jones, president of All Season Financial Advisors Inc., which has $115 million under management.
Mr. Buckingham, who said, “The magnitude of the rally has gone further than I would have anticipated,” compared the market's quick rebound to what happens when a seat cushion is compressed and then released.
Although there is no disputing the rebound potential of any steep market decline, what doesn't add up for some analysts is the market's rally in the context of factors including steady net outflows from stock mutual funds, extreme consumer pessimism, low trading volume and the fact that the $3.4 trillion sitting in money market funds is earning next to nothing.
“The biggest risk right now would be to be out of the market, yet for some reason, money is still coming out of stock mutual funds and moving into bond funds,” said Ryan Detrick, senior technical strategist with Schaeffer's Investment Research Inc.
Over the five-week period through Oct. 14, stock mutual funds experienced $15.1 billion in total net outflows, while bond funds had $58.5 billion in total net inflows over the same period, according to the Investment Company Institute.
Negative consumer sentiment is considered by some analysts to be a screaming “buy” signal.
“Not until all the money has found its way in and nobody is worried anymore should we be worried,” Mr. Jones said.
There are, however, other characteristics of this market that lead some money managers to question the traditional indicators.
“While we're not in the business of picking highs or lows, we must remain respectful of significant technical areas,” said Jeffrey Beamer, portfolio manager with Lacerte Capital Advisers LLC. According to his analysis, the stock market is slightly above a trend line leading from the market's peak in October 2007 to a lower peak in May 2008.
“We still remain 30% off the market's closing high of October 2007, but the market has rallied up into some significant technical resistance,” Mr. Beamer said. “The fact is, we are now entering into the heart of earnings season in a traditionally nervous month of the year, and when combined with where we stand technically in the market, this could lead to some increased volatility and a reason to be prudent.”
Other indicators that give money managers pause relate to the quality of the stocks leading the rally to this point.
“We're talking about a rally that has been, pardon my French, crap-led,” said Mr. Buckingham, referring to big stock price gains by some companies that were beaten down for being associated with many of the problems facing the economy. “For some reason, we haven't seen significant appreciation in the safer stocks like Wal-Mart [Stores Inc.],” he said.
The fact that many of the companies leading the rally are out of whack with traditional analysis doesn't bode well for the strength of the stock market, according to Tim Knepp, chief investment officer at Genworth Financial Asset Management Inc., which manages $7 billion.
Absent signs of any changes that would represent an aggressive economic recovery, he said it isn't normal for many of the cyclical stocks to be doing so well at this point.
“We've even seen some homebuilders and real estate stocks rally,” he said. “A lot of the sectors that have rallied so far typically don't rally until we're out of the woods.”
E-mail Jeff Benjamin at [email protected].
