Unmoved by the Mergers

Mary Ann Bartels, technical research analyst at Merrill Lynch and author of the weekly Hedge Fund Monitor, writes that net exposure to the equity market by long/short equity funds is below average. That's significant, because this type of hedge fund comprises 50% of the total $521 billion estimated hedge fund assets under management.

"If the market continues to rally, long/short hedge funds will not have enough exposure to equities, and they will likely move to the high beta areas of the market to gain exposure," writes Bartels. This means covering short positions in the small-cap space, which would boost the Russell 2000, and buying the Nasdaq 100 outright, she writes. The Nasdaq 100 gained 0.2% Monday.

"We look for small caps and the Nasdaq to rally an additional 5% to 10% from current levels," she writes, adding that she believes the S&P 500 will add on about 3%. The Thanksgiving holiday is traditionally bullish, as the stock market tends to close up ahead of a holiday weekend, she adds.

Bartels puts her year-end target range for the S&P 500 at 1425 to 1450, the Dow at 12,600 to 12,700, and the Nasdaq Composite at 2550 to 2650.

"This is not a call based on the technical outlook for the market, but on a liquidity buyer chasing returns into year-end," she writes.

According to Birinyi Associates' Justin Walters, the year-end rally is likely. The Dow as averaged a 3.1% additional gain through the end of the year in years the index was up more than 10% from midyear to the start of the Thanksgiving week. The Dow was up 10.7% from the end of the second quarter through last Friday. Only twice of 11 times did the Dow decline under these circumstances, according to Walters.

So, on a day where the markets seemed ready for a pullback, without any bearish forces pressuring the indices, they held their ground. If the post-Thanksgiving holiday sales hold up, a dreaded year-end crash seems unlikely.

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