Is the Rally Losing Steam?

Leo Kolivakis's picture

Via Pension Pulse.

Ben Levihsohn and Jane J. Kim of the WSJ wrote an interesting weekend piece, How to Play a Market Rally:

Forget "buy and hold." It is time to time the stock market.


10 long years, market rallies have ended badly for investors. Now,
with stocks up 15.6% in four months, strategists are beginning to
suggest that ordinary investors start dialing back on risk.


doesn't mean dumping shares willy-nilly. With the Federal Reserve
committed to flooding markets with liquidity, it still makes sense to
be in equities. But "if you've ridden the market up, you might want to
do some trimming," says Steven Shueh, managing partner at Roundview


Some investors may already be starting. The Dow Jones Industrial Average has given up 2.2% from its Nov. 5 high.


first step is to disabuse yourself of the notion that it's impossible
to time the market. It turns out that sometimes you can. When markets
are stuck in a trading range for an extended period, selling into
strength and buying into weakness can outperform buy-and-hold


If that sounds like
sacrilege, it may be because mutual-fund firms have spent decades
persuading you to keep your money in their stock funds through thick
and thin so they could collect bigger profits.


an investor with a $1 million portfolio on Dec. 24, 1998, the first
time the Standard & Poor's 500-stock index was at its current
level. But if the investor had merely held on, he would have seen
essentially zero appreciation through Nov. 11 of this year. If that
same investor instead had sold one-tenth of his portfolio every time
the stock market gained 20% and allocated one-fifth of his cash to the
market when stocks fell more than 10%, he would have gained about
$140,000, according to a Wall Street Journal analysis.


approach using broad valuation measures performed even better. One
metric, the ratio of stock-market capitalization to gross domestic
product, tracks the market's value versus that of the underlying
economy. An investor with $1 million on Dec. 24, 1998, who sold 10% at
the end of each month when the ratio was above 115% and bought stocks
with 20% of his cash when the ratio was below 75%, produced a gain of
around $365,000. (The average has been about 91% over the past 20


Of course, investing success depends greatly on when you
start. If you had tried the strategy at the market low of October 2002,
for example, you would have come out about the same as if you had
bought and held.


Throughout this year the market has traded in a
band of about 20%—far away from both its 2007 high and its 2009 low.
Stocks gained 15% from Feb. 8 to April 23 on hopes that a robust
economic recovery in the U.S. would sustain global growth. By July 2,
it had dropped 16% to 1022.58, as disappointing economic data fueled
fears of a double-dip recession.


Now stocks are up again—but for how long?


Says Tobias Levkovich, head of U.S. equity strategy at Citigroup Inc.: "Investors should be more willing to hedge."


smartest way to do that now, strategists say, is to switch from
riskier holdings to steadier stocks and dividend payers; to embrace
"tactical" mutual funds that can jump in and out of asset classes; and
to consider bond funds designed to benefit from rising interest rates.




looking for safer stock plays should consider companies that are
initiating or boosting dividends, say strategists. Such companies tend
to be less volatile than the overall stock market. According to Ned
Davis Research, their "beta," a measure of volatility, is just 0.78
versus the broad market, compared with 1.08 for non-dividend payers. (A
beta of 1.0 means a stock is as risky as the market.)


payers may be especially attractive at this stage of the bull market.
Whereas non-dividend stocks typically trounce dividend payers during
the first leg of a bull run, dividend stocks since 1974 have
outperformed by three percentage points during the second leg and seven
percentage points during the third, according to Ned Davis Research.


biggest headwind for dividend stocks occurs in the very early stages
of the bull market, and we're past that in all likelihood," says Ed
Clissold, global equity strategist at Ned Davis.


Some dividend boosters in the S&P 500 include Dr Pepper Snapple Group Inc., Time Warner Cable Inc., Starbucks Corp., International Paper Co. and UnitedHealth Group Inc.


Big Tech


four-month rally has been led by the technology sector: the Nasdaq's
20.4% rise has outpaced the Standard & Poor's 500-stock index's
17.3% jump. Yet the tech sector has a price-earnings ratio of 13.7,
only slightly higher than the 13.3 P/E for the market as a whole,
according to Thomson Reuters data. Tech also has the fourth-lowest P/E of the 10 major market sectors.


concerned that the rally is overstretched might want to shift away
from highfliers and toward the 10 largest tech stocks, which Bank of
America Merrill Lynch dubs the "tech titans"—Microsoft Corp., International Business Machines Corp., Apple Inc., Intel Corp., Hewlett-Packard Co., Cisco Systems Inc., Oracle Corp., Google Inc., Qualcomm Inc. and Corning Inc.


Cisco, in particular, may be a better deal now after Thursday's 16% fall.


bad news drives these stocks down, it makes them more compelling," says
David Bianco, head of U.S. equity strategy at Bank of America Merrill
Lynch. He notes that as a group, big tech has gained just 4.0% this
year, versus 6.6% for the entire sector, and carries a P/E of about
12.8, versus about 16.7 for the others.


The key advantage big
tech outfits hold, says Mr. Bianco, is their strong balance sheets,
which should help them boost earnings even if growth slows. "They will
issue bonds, buy back shares and acquire other companies," he says.
"Large tech will benefit from that."


Go-Anywhere Funds


who wish to take some profits on stocks and redeploy it elsewhere
should consider "tactical allocation" mutual funds that allow managers
to jump into and out of asset classes at will.


When the stock
market trades in a band, as it has for the past decade, these sorts of
funds can perform well. According to data from investment-research
firm Morningstar Inc. through October, "world allocation" funds have
returned 5.08% annually over the past five years and 5.78% annually
over 10 years, compared with the S&P 500's 1.73% annualized gain
over five years and an annualized loss of 0.02% over 10 years.


tactical funds handily beat traditional equity funds during the
financial panic. "There were many investors in 2008 and 2009 who were
disappointed by how little their fund managers could do to react to or
react ahead of what was developing," says Loren Fox, senior analyst at
research firm Strategic Insight.

So far this year, financial-services firms have launched 28 world allocation funds, according to Morningstar.


Steven Roge, a portfolio manager in Andover, Mass., has been moving
more of his clients' money from traditional equity funds to flexible
funds—such as IVA Worldwide Fund, Pimco Global Multi-Asset Fund and FPA Crescent Fund,
among others—because of the managers' ability to make swift
asset-allocation decisions and their use of derivatives to reduce risks.


"Asset allocation plays such a big part in the return of the
portfolio that we could probably add 2% to 3% more in returns with less
downside just from the timeliness of the shifts in asset allocation,"
says Mr. Roge, who estimates that about 40% of his clients' portfolios
are in flexible funds, up from about 12% a few years ago.


The Goldman Sachs Dynamic Allocation Fund,
launched in January, aims to shift between asset classes based on
volatility. If, for example, the volatility of the S&P 500
increases, the fund would pare stock holdings.


"By taking some
risk off the table as asset-class risk increases, that potentially
sidesteps some of the downward movement in the market," says Theodore
Enders, portfolio strategist at Goldman Sachs Asset Management.


Tactical funds can be unpredictable. The $25 billion Ivy Asset Strategy Fund,
for example, held an 80% net equity position at the beginning of 2010,
then pared it back to 18% at the end of February, only to ramp it up
again a few months later.


"If you have a fund that's changing its asset
allocation frequently, it can be difficult to know how to position the
other funds in your portfolio," says Kevin McDevitt, a Morningstar


Note, also, that fees for these funds can be high. The Direxion Spectrum Global Perspective Fund, for example, has annual expenses of 2.55%.

Rising-Rate Funds


typical move after a powerful stock rally is to sell shares and buy
bonds. But with the Treasury markets surging to record highs recently,
putting more money there could be even riskier than leaving it in


The Fed is buying Treasurys
now, but not all maturities. When it said last week it would avoid
30-year bonds, their prices promptly tanked. That could be a hint of
what's to come once the Fed stops buying other maturities. Its ultimate
goal, after all, is to juice the inflation rate. Rising inflation is
usually bad for bonds.


Instead of Treasurys, investors should
consider "floating rate" funds, which buy variable-rate corporate
loans—and therefore collect more money when rates rise. In 2003, for
example, when the Fed started raising rates, floating-rate funds gained
10.4% while short-term bond funds gained 2.5%, according to

There are at least 31 open-end funds and 10 closed-end funds to choose from. Morningstar's picks in this category include the Eaton Vance Floating-Rate Fund and the Fidelity Floating Rate High Income Fund, which boast experienced management teams and solid track records.


Warren Ward, a financial adviser in Columbus, Ind., says he is considering the Fidelity Advisor Floating Rate High Income Fund
for his clients because of manager Christine McConnell's experience
through up and down markets. Another plus: The fund holds a considerable
amount of cash, which should allow it to meet any redemptions without
having to sell securities, he says.


"If rates rise,
floating-rate funds offer investors some protections," says Mr. Ward.


"I would like to say go into bonds to get yourself out of stocks, but I
think they're more risky right now."

Bonds are a hell of a lot more risky right now, but as Randall Forsyth of Barron's notes, Bonds Are Not Dead Yet:

yields continued to climb last week even as the Federal Reserve began
its bond-buying operation known as QE2. As the U.S. central bank began
the second phase of its quantitative easing, heavy new-issue supplies
in all sectors encountered buyer resistance.


result was a rise in yields, especially for longer maturities, of
about 45 basis points (0.45 percentage points) from their lows of early
October, with about half of the increase coming in the past week alone.
That translated into price losses upward of 2%, roughly equal to the
give-back in the stock market.


the Treasury market, the 10-year- note's yield rose to 2.776% from
2.538% a week earlier and a low of 2.332% on Oct. 8, the low-water mark
since January 2009, Dow Jones Newswires notes. Meantime, the 30-year
bond yield rose to 4.274% Friday from 4.122%, in part because of weak
demand at Wednesday's auction of the issue.


That sounds relatively trivial but it resulted in the price of iShares Barclays 20+ Year Treasury Bond exchange-traded
fund (ticker: TLT), a popular way to participate in the long end of
the market, falling 2.2% on the week. Even the less volatile iShares Barclays 7-10 Year Treasury ETF (IEF) lost 1.4% for the week.


corporate market also buckled under the weight of $21 billion of new
issues in the first three days of the week, prior to the Veterans' Day
holiday, and is bracing for $25 billion of offerings this week. The
iShares iBoxx $ Investment Grade Corporate ETF shed 2% in sympathy.


municipal market was hit as well with yields of triple-A 20-year bonds
up over 20 basis points to around 3.70%. As a result the iShares S&P National AMT-Free ETF
(MUB) was down 2.3% on the week. Some closed-end muni funds were
pummeled by upward 7%-10%, according to Jerry Paul, who heads Essential
Investment Partners in Denver, which specializes in closed-end-fund
special situations. Closed-end funds' use of leverage makes them
inherently more volatile. Moreover, many had been bid up to large
premiums. Still, growing disquiet over municipal finances cast a pall
over the sector.


But even if the
bull market in bonds is dead, as declared the Bond King, otherwise
known as Bill Gross, the founder and co-chief investment officer of
Pimco, the manager of the world's biggest bond fund, there's an upside:
higher yields.


The end of the bull
market does not necessarily mean a bear market has started, counters
James Kochan, a bond-market veteran whose career predates the beginning
of the bond bull market and is now chief fixed-income strategist of
Wells Fargo Advantage Funds. With inflation and short-term interest
rates likely to remain low, bonds outside of Treasuries still provide
value, Kochan says. "This is the income phase of an income-investment
cycle, not the bear phase—yet," he adds.


That means looking to
sectors of the bond market where income returns more than offset the
risk of rising yields and falling prices. In the corporate sector, that
means the high end of high-yield market with credit ratings of
single-B or double-B, which provide respective yield spreads of 475 and
375 basis points. More speculative credits, with ratings of triple-C,
don't offer commensurate value.


bonds also offer good value and income, Kochan adds. He prefers longer
maturities because of the steep muni yield curve (that is, long bonds
yield a lot more than those with shorter maturities). For instance,
30-year triple-A munis yield 4.20%, markedly more than 2.56% for
10-year bonds or 1.18% for five-year bonds.


of triple-A credits, he prefers the yield pickup in the single-A to
triple-B muni credits. For 10-year maturities, extra yield equals 100
basis points for single-A bonds and 150 basis points for triple-Bs. For
30-year maturities, the spreads are 250 basis points for single-A
credits and 400 for triple-Bs. Quality spreads, already wide this
year, have increased in the past couple of weeks, Kochan notes.

I'm not so sure about the municipal bond market where systemic credit risk is very high,
causing a great deal of anxiety among bond investors. But at the end of
the day, the Fed will do whatever it takes -- even buy municipal bonds
-- to head off any systemic crisis.

As far as the stock market, I just see this as another opportunity to
load up on shares. My personal favorites remain Chinese solar stocks
which sold off strongly after most reported stellar earnings. One of my top picks in this group is LDK Solar, which smashed its estimates and then sold off (warning: these stocks are not for the faint of heart).

Tim Hayes, chief investment strategist at Ned Davis Research, spoke
with Carol Massar and Matt Miller on Bloomberg Television's "Street
Smart" saying he expects a 3-5% correction in stocks in the next few
weeks (click here to watch the interview).
Hayes is one of the best strategists in the business and a super nice
guy. I think he's probably right. It's only normal for portfolio
managers to lock in profits going into year-end, but I warn you, if you
think this the beginning of some sort of systemic collapse, you're in
for a big surprise.

This market is heading higher -- much,
much higher. And all of you trying to time these markets will get your
heads handed to you. Buy and hold maybe dead for the overall market, but
it certainly isn't dead for some sectors and stocks. If you pick your
spots well, you'll make decent profits as this rally still has steam.
The only thing is you need to accept a lot more volatility. There is is
nothing you can do about that.

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Everybodys All American's picture

One word Leo ... Ireland.

Bill Lumbergh's picture

Leo do you place stops or have some means of knowing when to cut losses?  The mantra of the the "reflation" trade has worked since 2009 and I imagine has become somewhat self-reinforcing for you.  All of your writings never seem to acknowledge underlying fundamentals.  Were you writing similar thoughts in 2007 and 2008 and quoting these "experts"? 

Certainly the market can go higher due to QE2 but this cannot end well since higher commodity prices squeeze margins.  In a high unemployment environment large prices increases cannot be passed on to customers effectively.  I will ask you again even though you refuse to answer each and every time but how did the Bernanke put work for you in 2008?

geno-econ's picture

All depends on how much you have to survive. If your secure , stay out of the market and sleep well. Apparently that is what Ballmer and others are doing.  If your down on your luck, what is the difference?---go ahead and roll the dice .  Afterall ,that is what Bernanke is doing on your behalf.  Problem is if everyone is rolling the dice, we are sure to all go down because by definition it is against the fundamentals. And that is why Loe should be quiet and concentrate on Greece and pension funds that are no better than Greece

Silverhog's picture

No market for me. Still getting calls from brokers. Who wants to fly in an airplane when the mechanic team is a bunch of Keynesian plumbers.

thepigman's picture

Not to pick a fight with uber bull Leo,

but QE2 is actually Berspanke throwing China, Japan,

Germany, Brazil etc etc under the

bus. Unemployment is so awful we have

no choice. Sure, China can keep pegging

but it'll cost them a fortune. Cheaper

for them to live with lower exports.

Now look at all those markets..........

all bubbles (in protest to QE2, they self

identify as such, loudly) Funny thing,

all these export surplus countries thrown

under the bus by Obama and Berspanke

have equity markets that are correlated

1:1 with us, the good old USA. Get the

picture?  I don't even have to talk

about commodities...same deal. The

global pie is smaller than it used to be

and we're all fighting for a larger piece

of a smaller pie.


thepigman's picture

If you don't understand this dynamic,

better study hard prior to tomorrow's

open would be my advice.

thepigman's picture

When Shanghai dropped 5% on

Friday at the conclusion of the G-20

QE2 food fight,  I heard a distinct "pop"

Clapham Junction's picture

Forget Leo, I just found out THE BERNANKES secret plan, and almost bought a BMW just by clicking on the links on this page.



Goldenballs's picture

Stocks up,Gold and Silver prices manipulated,G20 announcement,everything in the Garden is rosy until the cracks properly open up and the sticking plasters come flying off.If lying was an Olympic sport America would be continual World Champions.

laosuwan's picture

Exactly. We all listened to ZH and did the rational thing and got out of equities only to watch them blast off without us. now we are tempted to get back in, its a sure sign the last leg of the crash is coming.

Wait, wait, wait. The crash is coming. Then we can buy back in and watch the market go sideways for 10 years.

tahoebumsmith's picture


Meet me in Vegas tommorow at 7:00 am. 3960 Las Vegas Boulevard South.....Four Seasons Hotel Las Vegas. We will map out our strategy and go for broke....rumor has it the tables are hot. Just remember that the house never loses. But don't worry, there will be plenty of distractions, so pack some viagra. Don't worry Leo, even though when it is over and you may feel like you got raped, you will still feel good about yourself. 

John_Coltrane's picture

Leo needs to start plotting his charts as SPY:Gold ratios (easy to do a and then he would notice there hasn't been any rally at all-just a steady debasement of the $.  Even AAPL is only at its Oct 2008 highs when priced in gold.  So, why waste your capital on anything other than gold, platinum or silver or miners?  Insiders have been selling at a ratio of over 1000:1 and they know a lot more than of the true condition of their balance sheets.

DaveyJones's picture

"the market is heading higher" sort of the opposite of your article ratings. As others said, the nominal value going up after QE2 (and all the other crap) is meaningless without other measurement

"The only thing is you need to accept a lot more volatility. There is is nothing you can do about that." Uh, yes there is ultimately, it's called political uprising, prosecution and the reinstatement of law 


obamaphobe's picture

POMO is only 600 billion.  That's only 20 trips to Asia for the messiah.  If the market continues the current slide pomo can not support it.  In fact it will only make the correction deeper.  I can hear cnbc now.  "pomo was supposed to raise equities, there must be  real fundamental and structural issues in our economy."    And who says that the liquidity pump will be invested in the upside.  Buying the dips is a sucker play.   

Mitchman's picture

" I can hear cnbc now.  "pomo was supposed to raise equities, there must be  real fundamental and structural issues in our economy."  

I think that's beyond CNBC's intellectual capabilities.

RockyRacoon's picture

I stopped reading at the Muni Bonds part... but that was at the end.  So, I guess I read it all.  Never mind.

No stocks/bonds for me!  I'm shopping for silver on Monday morning.

ebworthen's picture

Yes, the FED is probably telling the pension funds and investment houses "Don't worry, we got POMO and QE2, we got your back."

That will work until it doesn't work.

This is pump #2, remember, balloons pop.

steve from virginia's picture

Lessee ... since most S&P companies make their money overseas ... and don't pay wages to US workers, since most are effectively hedge funds playing the yield curve ... since the world has lingered @ the edge of a calamitous debt deflation (OECD) or hyperinflation (China/SE Asia) and sovereigns along with US states are ready to default ... since the finance sector is also ready to collapse from bad loans ... gee!

All that tells me I should run out and buy some stocks!

Past performance is a guarantee of future returns, right?




doolittlegeorge's picture

"buy the dips" alright--as in "the dips who pretend to manage your money" while only giving a shit about their own.  a lot of good people have already been annihilated by this worthless cabal of nobody's but you know what?  starting monday the worthless arrogant "fucktards" are gonna get there's. and you know what?  even though it's NEVER enough IT'S A GOOD PHUCKING START!  I tip my hat to Jimmy Cramer.  Period.  it's not easy being bullish in general but this one's been a real particular beast.  it requires an "expertise" that simply put "goes unacknowledged by the fucktards" and all their little cock strokers who think it's all a big pile of bs to begin with.  well--HERE COMES THE REAL BULLSHIT PHUCKERS. of course you can't time the market--we all reach for it, though.  it's who we are.  and when we happen to be right it's the ability to "rein yourself in" that matters most.  now it's time for "the down-low" set to reveal just how much "all they know is how to fuck the Man and his money" while spouting off for all the world to see that "they don't need to be right they're so phucking smart."  All I have to say is "the Man with the money" is most displeased....  They never made him any money on the upside...guess who's gonna grab everything for himself on "poo hit the fan" week?  Let's just say "it ain't gonna be Cramer."

ElvisDog's picture

I don't know. I find the fact that Ballmer sold a sizeable portion of his Microsoft stock to be ominous. If he thought there was smooth sailing ahead for MS, and he should know, why would he sell such a large chunk. And Bezos/Chambers/Ellison have been similarly selling large chunks of their own company's stock.

Bear's picture

Taxes, taxes, taxes ... you will continue to see major selling by insiders this year and next as everyone will be trying to beat the taxman that come-ith. 

Azwethinkweiz's picture

Some people will have you believe these insiders sold because they "needed the cash" but if you're worth a couple hundred million, do you really need the cash that bad or would you rather be in cash so you're still worth a couple hundred million?

taraxias's picture

This market is heading higher -- much, much higher. And all of you trying to time these markets will get your heads handed to you


Leo = perma fucktard

Robslob's picture

I don't even read Cleo's post anymore...just the responses. Isn't he a bankrupt Greece guy or something?

jus_lite_reading's picture

Yes, I believe he was pumping NBG and got his ass handed to him.

AUD's picture

Stop hassling Leo, he's been right so far & will be right again.

There's no stockmarket panic on the horizon. Down days, weeks even, but no panic.

Fearless Rick's picture

AUD, u r funni./

Also, doofuss. Buy, buy. buy, like Cramer says.

AUD's picture

Like you know shit from clay

Mitchman's picture

I agree no stock market panic but watch what happens in Ireland.  If they play extend and pretend again, then it will be clear sailing as Leo predicts.  But if it comes down to what Merkel wants and the bondholders get it in the neck (I notice that Legarde of France is now also in support of the idea) then, Heaven forbid!, people may actually start looking at fundamentals again and stock prices will not look as good.

BTW, I note that they're already talking about restructuring the Greek IMF loan and the ink isn't even dry on the original!

AUD's picture

The fundamentals of a lot of stocks look better than the fundamentals of a lot of government debt. Considering the current spread of corporate yields over governments i.e. a bubble (in governments), I'm not even convinced that this 'flight to safety' in governments thing will keep occurring.

Mitchman's picture

I agree with you but the corporates should not be trading at the implied multiples at which they are trading today.

AUD's picture

"corporates should not be trading at the implied multiples at which they are trading today"

I am unsure of what you mean here.

Mitchman's picture

Sorry if I'm being unclear.  Based on the fundamentals, corporates should not be trading at the prices and multiples at which they are trading today.  I think the economy stinks and I think we are going to have earnings disappointments going forward.

AUD's picture

"corporates should not be trading at the prices and multiples at which they are trading today"

In terms of what, the dollar? The dollar is nothing more than the irredeemable & unpayable (read worthless) debt of the government. I think corporates should be trading at a premium (a hyperinflationary one) rather than a discount to governments, yet the discount is currently huge compared to any time in the last decade. This is despite the ludicrous issuance of government debt in the last couple of years, as in exponential I mean.

Ok, so some corporate debt is garbage but this just reinforces my point. This same worthless garbage is now what central banks everywhere have in their vaults purporting to give their liability, being the dollar, euro etc, its value!

A ludicrously unstable situation which therefore is & will not be stable.

AUD's picture

"yet the discount is currently huge compared to any time in the last decade"

With the exception of 12 months or so of the 'GFC'.

Mitchman's picture

That raises a good question:  If the sovereign is worthless, what is the corporate worth?  If the corporate's assets are denominated in the same bankrupt currency, what have you got?

AUD's picture

A million, billion, quadrillion sovereigns?

Ned Zeppelin's picture

If you've ridden the train from 666 you've done well. Why not go all in

ILikeBoats's picture

Please everyone!  Keep playing at our casino!

BigDuke6's picture

I've been tempted to get back in - a sure sign a crash is coming.

Azannoth's picture

Youre damed if you do damned if you don't, they know when the retail investor piles in than they crash, so you can never win, unless you trade on a daily basis than you might have a chance but holding any 1 stock for longer than a week is russian rulete

Minion's picture

I think we're ripe for a minor pullback.  Major indices are about to break the 20 day EMA, but with all the IPOs next week, including Government Motors, I doubt that the PPT will let it sink very far.

Shameful's picture

Oh course the market will go up.  With the POMO rocket strapped to it how could it not move up in dollar denominated terms?  The only question is what will go up the most vs declining purchasing power of currencies.