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What if they gave a rally and nobody came?
That's pretty much what's been happening in the stock market over the past few months, with the Dow up nearly 20% since October but little volume behind the rise in stock price.
Analysts at JPMorgan’s global asset allocation group in a note today explored the lack of enthusiasm behind this rally:
[R]eal money investors slightly increased their equity exposure in January but remained below their historical average, suggesting they are still underweight. The picture is more mixed for hedge funds. Macro funds have moved even more short equities over the last few weeks while equity long/short funds raised equity exposures modestly.
In other words, Macro hedge funds do not appear to have participated in the equity rally while equity long/short funds have to some extent. It also appears that hedge funds have reduced overall leverage over the past month as, both the Merrill Lynch Fund Manager Survey and data on debit balances at the NYSE, showed leverage fell sharply.
In this vacuum, the result has been the melt-up in stock prices with many investors remaining skeptical. The skepticism has likely been reinforced by the fourth quarter earnings, which have been decidedly “meh” with slowing earnings growth and declining margins.
Here's more of what the folks at JPM had to say:
Two weeks ago? we reported that trading volumes over the start of 2012 across equities, credit, commodity futures and government bond futures were down around 25% compared to the previous two Januarys.
However, if we compare current volumes to the second half of last year we get a more mixed picture?. Volumes of cash equities traded across EM and DM are down around 20% while government bond future volumes are down 6%.
Interestingly, volumes of ETFs traded are down considerably more, irrespective of the asset class the ETF tracks. ? across equities, bonds and commodities, trading volumes of ETFs that track these assets are down on average 36% compared to the average daily volume over the second half of the year.
The only exceptions are ETFs that track credit which have a seen a slight increase in trading volumes compared to H2 11. Given that macro hedge funds are frequent users of ETFs, this further supports our conclusion below that hedge funds have not participated in the rally we have seen to start the year.
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The cheap easy money is still there, it just went to the sidelines during the last month. But it is coming back into commodities . They’ll outperform stocks in this low intrest rate enviroment.
its all gaps!
The cheap easy money that brought huge volume to Wall Street traders in years past isn’t there anymore. No surprise trading volume is down. It will stay down.
Prepare yourselves, the debt has grown
The economy stinks, the seeds have been sown
The investors are gone, the spread is a gap
Welcome to the market makers trap…
This isn’t THE rally yet, this is just a prelude.
Banks up to book value and technology names trading to fair value (such as aapl, which has an absurdly low P/E)
No, you will see the rally when it comes.
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