Melt-up Fuels Investor Confidence
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June 12th, 2009 by AdvisorAnalyst
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Last week Raymond James’ strategist Jeffrey Saut discussed underperformance angst, and how the sentiment is helping to drive stock prices higher, due to skeptical asset managers caving in to performance pressures from clients, peers and benchmarking. This is also referred to as melt-up, the opposite of meltdown:
MarketFolly.com (via SeekingAlpha): We believe that while there is massive panic on the downside as the market tanks, there is equal panic to the upside. Those who miss the initial ramp up begin to panic that they are missing the major move. Then, as the move becomes even more substantial, underperformance angst begins to set in. If you are a fund manager and you are underperforming the markets, you begin to panic. That same panic you felt when the market plunged 40% is now resurfacing as the market rips 30% higher right in your face. It then becomes very tempting to join the herd. Long time readers will know what we think about the herd mentality. You are either with the pack, or against the pack. Buy or die.
Such recent market action can be summed up by the saying that you need to trade the perception, not the reality. And, even if all the buying makes no sense to you, you have to follow along. Otherwise, you’re down huge and you’re losing assets left and right. After all, the industry is now constantly focused on near-term performance, remember? One bad month? Sorry, we’ve got to pull our funds out.
In the midst of what can safely be defined as underperformance angst, it appears that individual investors are slowly regaining confidence, a sign that there may be more upside in the current rally, but also reasons to be cautious:
Bespoke: While some measures of sentiment still show that investors have been slow to embrace the equity market rally, other measures are showing that they are now more comfortable with it. For example, the weekly survey of newsletter writers by Investors Intelligence shows that the spread between bulls and bears is at its widest level since January 2008 (47.7% bulls vs. 23.3% bears). However, while Investors Intelligence is showing relatively bullish levels of sentiment, the AAII survey of individual investors is still dead even, with an equal number of bulls and bears (39.35%).
Mutual Funds are now in their 12th consecutive week of rapid inflows:
WSJ: Total estimated inflows were $13.6 billion in the week ended June 3.
Stock funds had estimated inflows of $4.63 billion, up from $1.59 billion the previous week. Weekly outflows from stock funds topped $10 billion earlier this year before the market started to rebound in March, boosting traders’ confidence that the end of the bear market might be in sight. Inflows were $2.83 billion at U.S. stock funds, also marking their 12th-consecutive week of inflows, while foreign funds took in $1.8 billion.
Fund managers, however, remain wary, despite the performance pressures:
WSJ: While a stock surge might force a mutual-fund manager to jump in because he is judged against the index, the pressure on hedge funds is less.
Many funds are skeptical the economy has entered a new period of growth that justifies high equity multiples. Others fear dislocations from governments shoveling money at problems.
Some noted stock pickers remain wary.
Steve Mandel’s Lone Pine Capital bought long-dated, out-of-the-money call positions representing 2.6 million shares of a gold exchange-traded fund in the first quarter, while Och-Ziff Capital Management Group and Atticus Capital have been cautious on the market. A call option is the right to buy a security at a certain price.
If stocks keep surging, hedgies might have to jump in with two feet, giving the market another lift. But their continued hesitancy should be a sign of caution for investors.
Read more from the author/contributor here.
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December 27th, 2008 at 4:49 am
Tom, All are very good points to ponder over. A job is done well, if done by oneself, which exactly reflects in “The best decisions are rarely made by committee”. A well informed, educated and experience investor also can go miserably wrong – since investing is rule-based art. There are various anticipated and unexpected factors driving decisions.
Lisa
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