Sunday, August 26, 2012

Who is right?

Since beginning of this year, retail investors have been pulling money out from the stock markets while the stock markets continue to charge ahead.

The hedge fund managers are also holding a large chunk of cash though they are not in net short position. They are preparing to take advantage of market decline but their refusal to short stocks indicating the market can still rally ahead. Read the rest here Hedge funds are betting on disasters

It was reported recently on the internet that George Soros is holding 75% cash. Read here : George Soro fund maintains big cash position

When the markets (Dow Jones Industrial, S & P 500) were finally turning down after Dow did not make a new high but S & P 500 did, Mark Hulbert, a regular comentator of Market Watch, made  comments like rally was living on borrowed time. Read the rest here May-June correction was a failure

Is it true that the rally is living on borrowed time?

 Dow gained about 6% on the year-to-date basis. Let's look at the winners of Dow components that drive the gains.

  • It is obvious that stocks that are beaten down badly last year like financial and housing sector are getting back a bit of justice.
  • Industrial sector around the globe tanked but the US industrial sector looks pretty healthy as they are in expansion stage though the data is deteriorating rapidly.
  • Safe haven stocks that paying good dividend yield like telecom, health care and consumer discretionary are the winners.
  • Solid oil price is providing support for oil stocks.
  • Technology is sending a mixed message, outside Apple, I think the sector is in trouble.

I found this data after I have done the donkey job of looking at gainers and losers of Dow components. The conclusions are pretty much the same.

By sector breakdown, info tech is the largest piece of pie now. Market cap expanded by USD 1,785 b and Apple contributed to about USD 384 B or 21%. It is quite to safe to say that large gains were Apple driven and the question is can Apple continue to do the magic?

I would say consumer staple, discretionary and energy are getting very close to its valuation and in some cases over-valued, unless people would like to chase yield slightly above 5 to 10-yield of 1.7%.

That will leave us with financial and industrial sectors, can it be the next rally leader ? Some possibility on financial sector but I doubt industrial sector can.

Global financial markets are very interconnected nowadays. Mind you that some stock markets are very oversold in Europe and emerging markets especially China. A counter-rally in these markets will continue to provide positive reinforcement loop. Oversold counter rally markets will reinforce US market and in return US market will provide confidence to oversold markets to rally. Until either one is exhausted, tanking US market or exhausted counter rally loop is broken, trend trading will remain the best friend of brave and agile ones.

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