Two Eternal Bullish Arguments

Ever since I began trading many years ago, there have been two bullish arguments that have always seemed to exist. The first is that there is a lot of cash on the sidelines waiting to buy stocks, and the second is that money managers need to buy stocks in order to produce better relative performance.

There never seems to be a time when I haven't heard bulls argue that there is a lot of idle cash on the sidelines that will support the market. The problem is that there doesn't seem to be any correlation between cash in money market accounts and inflows into the stock market. Just because folks are holding cash, that doesn't mean they are looking to buy stocks with it at some point.

In the current environment, with interest rates near zero and the market going straight up, there wouldn't seem to be any motivation to hold cash, but people are obviously doing so because they don't trust the alternatives. People hold cash because it makes them feel safe and secure, and there is no way to anticipate when they will be inclined to put some of it into the market.

The second perennial argument, that money managers need to buy stocks into the end of the year in order to make up relative performance, is trickier. If a money manager is underperforming his benchmark, he can try to catch up by either being more aggressive in an up-trending market or by being more defensive in a down-trending market.

The bullish argument here is always premised by the belief that the market will stay strong. If it does, the only way for a money manager to create performance is by buying stocks with higher beta, i.e., those that move up or down faster than the overall market. For example, Apple (AAPL - commentary - Trade Now) has a beta of 1.5, which means that if the market moves up or down 1%, then Apple will on average move up or down 1.5%. So if a money manager believes the market is going to go up into the end of the year, the way to outperform is to buy Apple and outperform the move by 50%.

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.