Calls For A Rally - Wall Street's Conflict Of Interest
Have you ever wondered why most every single professional voice on Wall Street has called for a rally in the last week or so? Many a significant one. Russell Investments recently came out with a survey that 75% of market professionals are bullish. The anticipation seems to me to be palpable. I'm not talking about algorithmic or quantitative traders who may or may not be see a possible change in trend. I'm talking of the moving mouth pieces on Wall Street and everyone who hopped on the bandwagon.
I'm certainly less bearish because selling pressure has abated but no one really knows if a sustainable rally will develop or how far a rally might go. Just because selling pressure has abated for some time doesn't mean there will be a rally. (This is not a rally....yet. It is volatility within a price band.) There have been very few compelling stocks except for possibly major gold producers we highlighted as becoming attractive in late October. But, those have made massive moves since. Some as much as 100%. I no longer find their valuations compelling.
The current move off of the late November low looks like another bearish five-wave rising wedge similar to the one we highlighted back in May. And, while it may be a temporary phenomenon, intraday buying pressure peaked on December 11th. If we don't see a pick up in buying soon, we can likely conclude technical traders are toying with the market and ultimately we could see more short term weakness.
Even though we have not seen a rally in over a year, many of the requirements for a strong rally still remain quite weak. As an example, short interest imploded as the market was crashing as I commented a few weekends ago. That means Wall Street has been severely damaged by this market. When you hear market technicians talk about markets requiring time to recover from a crash, that's because of the damage that has been inflicted on market participants. Financial damage. Low short interest through a market crash tells us most professional money was on the wrong side of the trade and/or has been trying to catch a falling knife instead of participating on the side of the decline.
As I said a few weeks ago, I would classify my near term position as relatively neutral with the potential for a rally in the next month or two. To see the largest annual drop in stock prices and expect to see an automatic reversal without some period of price stabilization is very unlikely. We will obviously see a resumption in selling or sustained buying at some point. That might be a month, a week or a year. There is no law of nature that requires the market to do anything other than tread price and time. In other words, the absence of a declining market does not necessarily translate into a rising market. Current market participants may not have witnessed this type of market, but history has shown us this type of market after crashes.
The real issue I am trying to get at is why so many talking heads are out in force telling us this rally has legs. I'm using exact words lifted from a popular talking head. Most on Wall Street have no competency in quantitative trading or investment models to guide them. Remember, Wall Street is generally nothing other than opinion and emotion. Those same opinions and emotions were at record bullish levels right before the global economy and asset markets went dumpster diving. Something we noted as a serious problem before the dive started. And, something that the recent Russell survey confirms exists again. Russell tries to spin this data as positive but that is simply emotional bias. Russell needs a rally just like the rest of Wall Street.
Here is more likely the reality behind the calls for a rally. First, it's likely herd behavior. No one wants to be left behind in picking a bottom. One person calls something and the next thing you know, the entire financial community has jumped on board. You know, like peak oil. Remember, original thought is not often practiced in the financial community. Second, Wall Street is paid on how many assets they have under management - something we have repeatedly railed against. Let's use an example here. Bill Miller recently called a bottom in equities. Not a bottom but the bottom. In the same breath he called for the Federal Reserve to step in and start buying stocks to support prices. Why would Miller make such a request if he were so confident?
Miller's mutual fund assets have fallen 75%. Think about that. That means his income has fallen by much more than 75%. What would happen if your income fell by more than 75%. That would likely mean you are collecting unemployment or having difficulty making ends meet. And, that too applies to Miller and more broadly to Wall Street and the financial community. There in lies the conflict of interest. Wall Street is teetering on the precipice. And, what happens when an industry is on the verge of collapse as they see record losses and outflows of capital? They do anything they can to stop it. The survival instinct. And, in this case, what might that be? That would be grabbing the microphone and telling everyone that a rally is imminent in an attempt to stop outflows. And, then what? Do anything you can to stabilize prices or even rally the market. That includes hedge funds, mutual funds, money managers, etc. that are all seeing redemptions.
Miller and others need main street to believe or they may not have enough money to pay for their yachts, penthouses and Ferraris or worse, they may have to find a new career. With the decline in assets and outflows of investor capital, Wall Street is starting to look like a very bloated Humpty Dumpty from an SG&A perspective. ie, Top heavy and unstable. We could end up with a complete rout of employment in the financial sector without some type of stabilization in asset prices and/or investor outflows. But, for quite a few years we have said this will likely happen. Wall Street really needs to stem the decline of assets. And, that means they need a rally to stem outflows. Therefore, if they can, they will. And, the Fed is now attempting to provide the fuel.
Some data does point to a possible stabilization in the coming months but that someone can pick the exact bottom after the biggest one year crash in history and the current market slop we see should leave anyone with a modicum of common sense highly dubious. Anyone calling late November the bottom or a tradable bottom is at best lucky and at worst not looking out for the best interests of investors or clients. But, then why should that be a surprise after many now see the real Wall Street for the first time.
The onus is on the bulls to prove their mettle given the damage that has been done. Until we see more evidence to the contrary, I would give significant, if not equal, credence to short term concerns of weakness back into the November low or the 600-724 region (S&P) we have highlighted.
I'm certainly less bearish because selling pressure has abated but no one really knows if a sustainable rally will develop or how far a rally might go. Just because selling pressure has abated for some time doesn't mean there will be a rally. (This is not a rally....yet. It is volatility within a price band.) There have been very few compelling stocks except for possibly major gold producers we highlighted as becoming attractive in late October. But, those have made massive moves since. Some as much as 100%. I no longer find their valuations compelling.
The current move off of the late November low looks like another bearish five-wave rising wedge similar to the one we highlighted back in May. And, while it may be a temporary phenomenon, intraday buying pressure peaked on December 11th. If we don't see a pick up in buying soon, we can likely conclude technical traders are toying with the market and ultimately we could see more short term weakness.
Even though we have not seen a rally in over a year, many of the requirements for a strong rally still remain quite weak. As an example, short interest imploded as the market was crashing as I commented a few weekends ago. That means Wall Street has been severely damaged by this market. When you hear market technicians talk about markets requiring time to recover from a crash, that's because of the damage that has been inflicted on market participants. Financial damage. Low short interest through a market crash tells us most professional money was on the wrong side of the trade and/or has been trying to catch a falling knife instead of participating on the side of the decline.
As I said a few weeks ago, I would classify my near term position as relatively neutral with the potential for a rally in the next month or two. To see the largest annual drop in stock prices and expect to see an automatic reversal without some period of price stabilization is very unlikely. We will obviously see a resumption in selling or sustained buying at some point. That might be a month, a week or a year. There is no law of nature that requires the market to do anything other than tread price and time. In other words, the absence of a declining market does not necessarily translate into a rising market. Current market participants may not have witnessed this type of market, but history has shown us this type of market after crashes.
The real issue I am trying to get at is why so many talking heads are out in force telling us this rally has legs. I'm using exact words lifted from a popular talking head. Most on Wall Street have no competency in quantitative trading or investment models to guide them. Remember, Wall Street is generally nothing other than opinion and emotion. Those same opinions and emotions were at record bullish levels right before the global economy and asset markets went dumpster diving. Something we noted as a serious problem before the dive started. And, something that the recent Russell survey confirms exists again. Russell tries to spin this data as positive but that is simply emotional bias. Russell needs a rally just like the rest of Wall Street.
Here is more likely the reality behind the calls for a rally. First, it's likely herd behavior. No one wants to be left behind in picking a bottom. One person calls something and the next thing you know, the entire financial community has jumped on board. You know, like peak oil. Remember, original thought is not often practiced in the financial community. Second, Wall Street is paid on how many assets they have under management - something we have repeatedly railed against. Let's use an example here. Bill Miller recently called a bottom in equities. Not a bottom but the bottom. In the same breath he called for the Federal Reserve to step in and start buying stocks to support prices. Why would Miller make such a request if he were so confident?
Miller's mutual fund assets have fallen 75%. Think about that. That means his income has fallen by much more than 75%. What would happen if your income fell by more than 75%. That would likely mean you are collecting unemployment or having difficulty making ends meet. And, that too applies to Miller and more broadly to Wall Street and the financial community. There in lies the conflict of interest. Wall Street is teetering on the precipice. And, what happens when an industry is on the verge of collapse as they see record losses and outflows of capital? They do anything they can to stop it. The survival instinct. And, in this case, what might that be? That would be grabbing the microphone and telling everyone that a rally is imminent in an attempt to stop outflows. And, then what? Do anything you can to stabilize prices or even rally the market. That includes hedge funds, mutual funds, money managers, etc. that are all seeing redemptions.
Miller and others need main street to believe or they may not have enough money to pay for their yachts, penthouses and Ferraris or worse, they may have to find a new career. With the decline in assets and outflows of investor capital, Wall Street is starting to look like a very bloated Humpty Dumpty from an SG&A perspective. ie, Top heavy and unstable. We could end up with a complete rout of employment in the financial sector without some type of stabilization in asset prices and/or investor outflows. But, for quite a few years we have said this will likely happen. Wall Street really needs to stem the decline of assets. And, that means they need a rally to stem outflows. Therefore, if they can, they will. And, the Fed is now attempting to provide the fuel.
Some data does point to a possible stabilization in the coming months but that someone can pick the exact bottom after the biggest one year crash in history and the current market slop we see should leave anyone with a modicum of common sense highly dubious. Anyone calling late November the bottom or a tradable bottom is at best lucky and at worst not looking out for the best interests of investors or clients. But, then why should that be a surprise after many now see the real Wall Street for the first time.
The onus is on the bulls to prove their mettle given the damage that has been done. Until we see more evidence to the contrary, I would give significant, if not equal, credence to short term concerns of weakness back into the November low or the 600-724 region (S&P) we have highlighted.
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