Market Commentary

Stocks rose for the third consecutive day
July 09, 2010

Stocks rose for the third consecutive day—the first such occurrence since April--as a drop in jobless claims and higher than forecasted sales at some retailers bolstered confidence in the recovery.  Additionally the IMF raised its 2010 global growth forecast to 4.6% from April’s 4.2% expected rate.  If the global economy grew at this rate, it would be fastest expansion since 2007.   The IMF increased also increased the 2010 anticipated US growth rate to 3.3% from 3.1% forecasted in April, the greatest growth since 2004.

I ask what is the probability of a market melt up given massive cash balances and extreme pessimism.  As noted many times ex the financials the S & P 500 has amassed over $1.84 trillion or 11% of assets in cash, the highest level since the 1952 inception of this data point.  Hedge fund cash is now at 24% of assets versus 19% three months ago as per Bloomberg.

It has been greatly noted all are dazed and confused given the intense volatility and unending cross currents including the potential impact from Washington.  Because of this lack of clarity, June’s trading volume was the lowest in 13 years, falling 20% from May’s levels. [Bloomberg] 

As noted many times and as per most wire services approximately 82% of the volume is attributed to algorithmic trading.  Can I suggest this quantitative trading strategy is exerting greater influence than it may otherwise because of the dearth of participants?

As noted above corporate America and hedge funds—which historically represent about 20% of market volume--are awash with cash.   There are virtually no monies from mutual funds gravitating towards equities.   As per American Funds approximately $0.96 of every dollar flowing into mutual funds are invested into bond funds with a majority of this money gravitating to emerging market bond funds.

When I entered the industry about 25 years ago, one of the truisms is never too short a low volume declining market as such is suggesting that either the sellers are nearing exhaustion or there is no real conviction that prices will trade lower.  Any type of buying hypothetically will boost prices.

As asked above and as per the listed reasons, can a “melt up” occur?  I think the odds are over 50%.

What will occur today?

Last night the foreign markets were up. London was up 0.34%, Paris up 0.44% and Frankfurt up 0.52%.  Japan was up 0.52%and Hang Sang up 1.64%.

The Dow should open quiet following the biggest weekly in a year.  The 10-year is off 4/32 to yield 3.95%.