Archive

Daily Analysis | About

Economic Review

7/28/2009

Is the Equity rally a function of fundamentals or money funds chasing price action?

The exuberant rally in US equities managed to continue over the past week and with a majority of short covering completed, the next couple of weeks will be the real test of this sector.  The latest hype, given some better than expected housing data releases, is that the recession is over, however the question to address at this point is….are the recent gains in US stocks the result of solid fundamental corporate news or is there something else pushing the major indexes higher.

First of all, sounding the alarm bells that the recession is over because of a couple of OK housing data releases is a bit premature to say the least.  As far as sound fundamentals on the corporate front…they’re just not there, given the high likelihood of continued job cuts.  What seems to be a better explanation of what’s driving stocks higher is the catch-up game that fund managers are playing.  In other words, as the major Indexes post continued gains, many managed money funds need to increase their allocations to stocks in order to “not be left on the sidelines” should the equity sector produce double digit returns for 2009.  However, with a lack of sound fundamental support, what you may just see is a classic bull trap, as many players get long the market and with a lack of fundamental support, the pendulum quickly swings in the opposite direction.

Remember, July and August are classic summer markets, where seemingly sound market moves quickly turn direction.  The recent gains in the major Indexes have kicked technicals into positive mode….will it be a head fake?  Buyer beware.

Daily Analysis | About