Saturday, March 17, 2012

Waiting for the Market to Correct?

Angela Moon of Reuters reports, Stocks' correction coming? Not that again:

Investors are beginning to wonder if this Energizer Bunny of a rally can just keep going without taking a break or a fall.

Every Friday for the past couple of months, the question has hung in the back of investors' minds: Is the stock market's rally strong enough to continue without a correction?

Even with the S&P 500 above levels unseen since before the financial crisis, the answer remains: Yes.

The broad market index broke through 1,400 - a psychologically important level - for the first time in four years this week. On Friday, the S&P 500 closed at 1,404.17, its highest since May 20, 2008. The index is up for nine out of the past 10 weeks.

"We are seeing this unbelievable rally in the market and yet the market is unbelievably complacent. We haven't been this bullish for a long time," said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, based in Austin, Texas.

Indeed, the CBOE Volatility Index or VIX, Wall Street's fear gauge, plunged to a five-year low despite the S&P 500's stunning gain of 12 percent for the year so far. The VIX measures the expected volatility in the S&P 500 index over the next 30 days and generally moves in the opposite direction of the broad market. Investors often use VIX options and futures as a hedge against a market decline.

Frederick said the only concern is the wide spread between second- and third-month VIX futures, suggesting a rise in volatility in the longer term. But the front-month futures that expire next week have come down to levels near the spot VIX. The VIX fell 6.2 percent on Friday to end at 14.47, its lowest close since June 2007.

"I would like to see the VIX around 17 just because it tends to have a significant pop when there is bad news at current levels," Frederick said, adding that "frankly" there isn't that much negative news out there.

STRENGTH IN MIDCAPS

Further evidence of the market's bullish sentiment: The S&P 400 midcap index .MID has popped above the 1,000 mark, an area of strong resistance since last year, according to Ryan Detrick, senior technical strategist with Schaeffer's Investment Research, in Cincinnati.

"It's a big area of resistance, but we have moved above this. If we manage to stay here, then the strength in the overall market will advance further," Detrick said.

"Historically, April has been a strong month so we can even see the market going up to 1,440, which is the high made in May 2008," he added.

TRACKING THE BIG APPLE

The direction of Apple (AAPL) shares will also be in focus next week after the stock hit the $600 mark for the first time in history this week, only about a month after it topped $500.

Apple currently accounts for about 18 percent of the Nasdaq 100 stock index (NDX). Its weighting was cut to 12.3 percent from 20.5 percent last April, but the price surge has pushed the stock's weighting back up, making this index of 100 well-known companies hostage to the performance of a few technology titans like Apple.

With Apple's heavy weighting, investors are questioning whether the broad market can continue to rally even with a pullback in Apple shares.

"It's a name that a lot of people have exposure to so it definitely has an impact on indexes, but it seems even without Apple, the money gets put to work in other sectors and stocks," Detrick said.

While the VIX has been sliding, the expected volatility in Apple has increased, judging by a VIX index that tracks Apple options. Apple, like IBM and other bellwether names, has its own VIX index.

The CBOE Apple VIX index .VXAPL, which measures the expected 30-day volatility of the underlying shares of Apple, jumped 35 percent this week, suggesting more gyrations ahead as more investors speculate on short-term moves.

As I wrote in my last comment, scared money is getting more scared. Way too many investors are sitting on the sidelines fearing some massive correction in stocks without understanding the liquidity tsunami propelling them higher. When central banks pump up the jam, providing bankers money for nothing and risk for free, watch out, stocks can keep climbing any wall of worry.

Last night I read about how Warren Buffett is on his way toward another monster score:
Shares of Bank of America are up 4 percent today, and the stock is now at $9.20.

This brings to mind the fact that Warren Buffett is on his way towards making another killer investment.

Last August he sunk $5 billion into the bank while it looked like it was in another spiral, and the stock was just above $7.

Now bear in mind, he didn't just buy common stock.

He bought preferred stock paying 6 percent returns and the right to buy a whopping 700 million shares at $7.14.

So suffice to say, this is another home run.

It's also worth noting that the stock fell fairly sharply after Buffett's move (dropping briefly below $5 in late December) and everyone wondered whether he blew it. Well, he didn't, and the stock has just been on a tear this year.

Well done, Warren.

Well done indeed. Last August, I wrote a comment asking whether Bank of America is rotted to the core, basically showing you to ignore what the doomsayers on Zero Hedge were saying. If you bought the stock along with Warren back then, you would have had to endure a volatile Q3, but you would have still been up big.

Bank of America and all banks are a bet on the US recovery. A lot of these big banks were heavily shorted last year, but now they're starting to forge higher, short sellers are covering, and off we go. I can also tell you short sellers have been covering their positions in US coal and steel stocks, two industries that still have a lot of upside from these levels.

As far as Apple, I wouldn't worry too much about a collapse in their shares. But right now I'm looking hard at Research in Motion (RIMM) and thinking of betting on Blackberry's revival.

I see a lot of opportunities out there for good stock pickers. There will always be someone on television telling you the market "needs to correct" or the "VIX is too low" or "there is no volume supporting this market".

Rubbish! All rubbish! Volume is picking up nicely, especially in the stocks I'm looking at. The VIX can go lower and stay low for a long time as shares move higher. The market doesn't need to correct in any meaningful way. It can keep grinding higher.

I know, what if Israel bombs Iran, what if China's red hot economy stalls, what if Portugal goes bankrupt? All these worries have been in the background for a long time and yet the market keeps grinding higher. (Food for thought: What if every major pension plan cut its allocation to bonds to invest more in equities?)

As I stated in my last comment, the biggest tail risk in this market is a liquidity melt-up unlike anything you've ever seen before. Investors sitting this out, hoping for a major market correction, are going to be chasing risk assets higher in the second half of the year.

And let me end by making a bold prediction: the S&P 500 will likely end closer to 1600 than 1500 at year-end (still, I prefer picking stocks than betting on the overall market).

Below, Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School, and Michael Crofton, chief executive officer of Philadelphia Trust Co., talk about the outlook for U.S. stocks. They speak with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart.

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