This column originally appeared on Real Money Pro at 7:33 a.m. EST on March 6.
NEW YORK (Real Money
) -- Given the stair-step move higher with limited downside pressure, it certainly feels as though fund inflows
have likely reversed the previous week's fund outflows in the last five to seven trading days, as the prospects for record highs in the indices have attracted investors.
Fundamentally, I remain in the camp that believes that global easing masks an underlying economic weakness and vulnerability that are being challenged by secular headwinds. Policy driven growth is of lower quality, may be more fleeting than many observers recognize and should be accompanied by less-than-historic valuations.
Importantly, the bullish throng is ignoring the continuing risks in Europe, the fiscal drag of policy, the reluctance of our leaders to address the burgeoning deficit and the risks (to business and consumer confidence) and the downside to corporate profits associated with the above uncertainties and with other influences and challenges.
Technically, yesterday's all-time high in the DJIA
was met with a new cyclical recovery high in the S&P 500
and in NYSE
breadth. What was missing was a classic and confirming 90% up day. Put buying remained elevated -- in fact, the 10-day put/call ratio is at the same level experienced in mid-November (a point in time when the current bull leg commenced).
These readings and the consistency of the advance suggest to me that, similar to retail investors, institutional investors (particularly hedge funds) are piling into stocks and are buying insurance in the form of puts. If the highs hold in the days/weeks ahead, one would expect a diminution of put buying (as worries about a correction subside) and the establishment of an overbought condition, which will likely result in a corrective market phase.
More and more, Mr. Market is behaving like 1987, a period of near-parabolic moves higher. But let's not lose sight of the fact that even in that year, 26 years ago, the markets corrected between the big first-quarter rise and the final leg in the summer that lead up to the October 1987 crash.
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