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Welcome to the Wolf Market?
A couple of interesting articles appeared this Sunday. Graham Bowley of the NYT reports, In Striking Shift, Small Investors Flee Stock Market:
Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
If
that pace continues, more money will be pulled out of these mutual
funds in 2010 than in any year since the 1980s, with the exception of
2008, when the global financial crisis peaked.
Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
One of the phenomena of the last several decades has been the rise of
the individual investor. As Americans have become more responsible for
their own retirement, they have poured money into stocks with such faith
that half of the country’s households now own shares directly or
through mutual funds, which are by far the most popular way Americans
invest in stocks. So the turnabout is striking.
So is the
timing. After past recessions, ordinary investors have typically
regained their enthusiasm for stocks, hoping to profit as the economy
recovered. This time, even as corporate earnings have improved,
Americans have become more guarded with their investments.
“At
this stage in the economic cycle, $10 to $20 billion would normally be
flowing into domestic equity funds” rather than the billions that are
flowing out, said Brian K. Reid, chief economist of the investment
institute. He added, “This is very unusual.”
The
notion that stocks tend to be safe and profitable investments over
time seems to have been dented in much the same way that a decline in
home values and in job stability the last few years has altered
Americans’ sense of financial security.
It may take
many years before it is clear whether this becomes a long-term shift in
psychology. After technology and dot-com shares crashed in the early
2000s, for example, investors were quick to re-enter the stock market.
Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.
For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession.
“For a lot of ordinary people, the economic recovery does not feel
real,” said Loren Fox, a senior analyst at Strategic Insight, a New York
research and data firm.
“People are not going to rush toward the stock
market on a sustained basis until they feel more confident of
employment growth and the sustainability of the economic recovery.”
One investor who has restructured his portfolio is Gary Olsen, 51, from
Dallas. Over the past four years, he has adjusted the proportion of
his investments from 65 percent equities and 35 percent bonds so that
the $1.1 million he has invested is now evenly balanced.
He had worked as a portfolio liquidity manager for the local Federal Home Loan Bank and retired four years ago.
“Like everyone, I lost” during the recent market declines, he said. “I needed to have a more conservative allocation.”
To be sure, a lot of money is still flowing into the stock market from
small investors, pension funds and other big institutional investors.
But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.
Until two years ago, 70 percent of the money in 401(k) accounts it
tracks was invested in stock funds; that proportion fell to 49 percent
by the start of 2009 as people rebalanced their portfolios toward bond
investments following the financial crisis in the fall of 2008. It is
now back at 57 percent, but almost all of that can be attributed to the
rising price of stocks in recent years. People are still staying with
bonds.
Another force at work
is the aging of the baby-boomer generation. As they approach
retirement, Americans are shifting some of their investments away from
stocks to provide regular guaranteed income for the years when they are
no longer working.
And the flight from stocks may also
be driven by households that are no longer able to tap into home
equity for cash and may simply need the money to pay for ordinary
expenses.
On Friday, Fidelity
Investments reported that a record number of people took so-called
hardship withdrawals from their retirement accounts in the second
quarter. These are early withdrawals intended to pay for needs like
medical expenses.
According to the Investment Company
Institute, which surveys 4,000 households annually, the appetite for
stock market risk among American investors of all ages has been
declining steadily since it peaked around 2001, and the change is most
pronounced in the under-35 age group.
For a few months at the
start of this year, things were looking up for stock market investing.
Optimistic about growth, investors were again putting their money into
stocks. In March and April, when the stock market rose 8 percent, $8.1
billion flowed into domestic stock mutual funds.
But then
came a grim reassessment of America’s economic prospects as
unemployment remained stubbornly high and private sector job growth
refused to take off.
Investors’ nerves were also frayed by the
“flash crash” on May 6, when the Dow Jones industrial index fell 600
points in a matter of minutes. The authorities still do not know why.
Investors
pulled $19.1 billion from domestic equity funds in May, the largest
outflow since the height of the financial crisis in October 2008.
Over all, investors pulled $151.4 billion out of stock market mutual
funds in 2008. But at that time the market was tanking in shocking
fashion. The surprise this time around is that Americans are withdrawing
money even when share prices are rallying.
The stock market
rose 7 percent last month as corporate profits began rebounding, but
even that increase was not enough to tempt ordinary investors.
Instead,
they withdrew $14.67 billion from domestic stock market mutual funds
in July, according to the investment institute’s estimates, the third
straight month of withdrawals.
A big beneficiary has been bond funds, which offer regular fixed interest payments.
As
investors pulled billions out of stocks, they plowed $185.31 billion
into bond mutual funds in the first seven months of this year, and total
bond fund investments for the year are on track to approach the record
set in 2009.
Charles Biderman, chief executive of
TrimTabs, a funds researcher, said it was no wonder people were putting
their money in bonds given the dismal performance of equities over the
past decade. The Dow Jones industrial average started the decade
around 11,500 but closed on Friday at 10,213. “People have lost a lot
of money over the last 10 years in the stock market, while there has
been a bull market in bonds,” he said. “In the financial markets, there
is one truism: flow follows performance.”
Ross Williams, 59,
a community consultant from Grand Rapids, Minn., began to take profits
from his stock funds when the market started to recover last year and
invested the money in short-term bonds, afraid that stocks would again
drop.
“We have a very volatile market, so we should be in
bonds in case it goes down again,” he said. “If the market is moving
up, I realized we should be taking this money and putting it into
something more safe rather than leaving it at risk.”
So what is causing all this anxiety among retail investors? Economic
uncertainty, lack of confidence and lack of leadership are all factors.
And maybe they're realizing the game is rigged so only a few elite hedge
funds and big prop traders at major banks make money while the retail
crowd keeps getting suckered into the markets only to see their savings
dwindle.
Moreover, as Kristina Peterson of the WSJ reports, Not Bull, Not Bear: Meet the Wolf Market:
Out
of the quest to accurately describe hybrid concepts came the spork,
brunch, pluot and mule. One investor's struggle to characterize the
U.S. stock market's recent twists and turns led to new market
terminology.
Welcome to the "wolf" market.
The
wolf market is characterized by a tight trading range, increased
volatility, high stock correlations and quick reversals, said its
coiner, Michael Purves, chief global strategist and head of derivatives
research at BGC Financial. Choppy trading makes it hard to pick stocks
based on fundamental qualities, leaving shorter-term options and
technical analysis better tools for navigating its bounces, he said.
"I
was walking around the block one night and thought, you know, we need
another animal," Mr. Purves said. "A wolf is clearly a smaller animal
than a bull or a bear, but it's very quick and decisive."
Mr.
Purves dates the start of the wolf market to late April although its
origins reach further back, he said. In the rally from the March 2009
lows, investors priced in expectations of a faster recovery than has yet
materialized. The market has struggled to find direction, balancing
the drag from the late spring European sovereign-debt crisis and the
recent slew of lackluster economic data with the more encouraging
second-quarter earnings. That has left trading trapped in a tight range,
subject to sharp ups and downs.
On the bearish side, Mr. Purves
doubts the Standard & Poor's 500 index will be able to break above
its April high of 1225 by the end of the year. But bulls can point to
strong second-quarter earnings and demand from growing economies such
as China, keeping a floor around 1010 in the S&P 500, he predicted.
Meanwhile, the CBOE Market Volatility index, known as the market's
fear gauge is likely to stay elevated between 25 and 35 for longer than
normal. The VIX closed Friday at 25.49.
Of
course, low volume during August trading has exacerbated market
swings. Monday's trading volume was the lowest of the year and isn't
likely to substantially increase until September.
"This is a
market that's trying to feel its way and it's feeling its way during an
extremely slow period in which many folks are out on vacation," said
Robert Pavlik, chief market strategist at Banyan Partners. "We've
obviously exited the recession, but people are still nervous about the
conditions."
With stocks trading closely together as
macroeconomic issues dominate the market, investors are relying more
heavily on technical analysis, Mr. Purves said.
In part, the rise of
algorithmic trading already has made the market's moves more closely
tied to technical triggers. Also, an environment where interest rates
are close to zero makes cash-flow analysis of companies difficult.
"In
the absence of something else, technicals loom larger," Mr. Purves
said. He also advocates turning to options to make shorter-term bets in
a murky market.
The wolf market may
be here to stay, at least until the economic recovery accelerates or
another catalyst prompts the market to find footing. Mr. Purves
believes the wolf market will last into 2011.
"It's going to take a long time to reverse to a classic economic cycle," he said.
The
wolf market is also a byproduct of the Fed sponsored liquidity tsunami.
With so much money flowing into the financial system, and so many
hedge funds and prop desks chasing "alpha", we shouldn't be
surprised to see volatile markets at this stage of the cycle.
Will
the wolf market last a long time? It's possible, but my biggest
fear is that the "wolves" behind these markets will end up cannibalizing
each other, and society will end up paying a high price for
their reckless greed.
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Easy there Al, don't get your panties tied up in a knot! I still believe in the solar revolution, and putting my long-term money there. Now go work on some algorithms...the wolves are hungry! BTW, here's the best reason to be buying solars now:
Solar is a pipe dream, geothermal, hydro, and nuclear is the way of the future.
Alright Leo, you get credit where it's due. That's kind of funny. Good job staying cool.
Lower high's & lower low's w/a flattening 200 and declining 50, current price resting on the 200 and endorsed by Cramer?
You first...I'll be right behind you...LOL.
Why don't you just send your money to me for safe keeping? ;-)
Sigh ... it should be obvious that a very high percentage of the general populace now believes that the equity markets are a sham crooked casino and that they only exist to steal money from the populace for the benefit of Wall Street insiders. The populace will no longer gamble in the casino nor will they put their hard earned retirement money in the casino, only to be stolen by the Wall Street CONputers and the crooks that run them.
Until Wall Street makes the markets fair, they will have to be content with tearing each other apart (as hungry wolves fall on the weakest of he pack) until Wall Street becomes almost extinct.
Go Wall Street Goooooo! Tear at each other and give us a show!!
The price might be high but I'm sure the interest rate will be low and the payments extremely affordable.
Simple answer... If you don't know tomorrow if you'll have a job, there's no such thing as "risk capital."
How long before the "wolves" end up cannibalizing each other and we end up paying a high price for their reckless greed?
Very soon with idiots like this at the helm...
http://www.youtube.com/watch?v=BC88oox9TBo&feature=player_embedded