The stock market has momentum, fund managers have performance anxiety and nothing else matters, to quote
Metallica. Certainly, a raft of worse-than-expected economic data, cautious comments from Intel ( INTC) CEO Craig Barrett and disappointing results from Target ( TGT) didn't much matter on Thursday. Traders eagerly bought the intraday dips following those of the past two sessions. At day's end, the Dow Jones Industrial Average was up 0.8% to 8713.44, the S&P 500 higher by 0.8% to 946.67 and the Nasdaq Composite up 1.1% to 1551.38. At 1.5 billion shares on the New York Stock Exchange and nearly 2 billion in over-the-counter activity, volume was up from the previous two days, a bullish sign. Breadth was positive, although not wildly so, and while 251 Big Board names hit new 52-week highs, only 44 Nasdaq stocks pulled the trick. Some of the buying was ostensibly due to cautiously upbeat comments from IBM ( IBM) CEO Sam Palmisano -- Big Blue gained 1.1% -- and a bullish spin on the mostly woeful economic reports (more on that below.) Mostly, it seems as if stocks went up because they've been going up. Folks previously underweight equities or on the sidelines piled into what's been working lately for fear of missing the next big up move. This is commonly known as performance anxiety. "Fortunately, we had begun to reduce cash in March as reported here on expectations of a technical bounce," Brett Gallagher, who overseas about $400 million as head of U.S. equities at Julius Baer Asset Management, wrote in a midquarter update Wednesday. "We did not, however, change the low Beta associated with our portfolio holdings -- we may have to." I added the emphasis, but that's a pretty dramatic statement sans italics, as Gallagher seems to be saying: "We sat out the run-up in tech, biotech and speculative small-caps, but we can't afford to miss those kinds of (potential) capital gains any longer."
If nothing else, such candor is refreshing and I'm pretty certain he's not alone in feeling so inclined. However, while admitting to having "performance anxiety" Thursday afternoon, Gallagher is not "jumping into second-tier tech" and other speculative names. Rather than simply chasing performance, he believes "conditions are in place for a big liquidity rush" and is thus contemplating jettisoning his low-beta defensive names in health care and consumer staples, and buying higher-beta financials and energy stocks. (Because the trades haven't happened yet, Gallagher could not discuss specific candidates for sale or purchase.) "What we're worried about is a big bond rally from here," Gallagher said, explaining that a continued decline in interest rates makes equities more attractive in a dividend discount model, assuming no corresponding drop in earnings expectations. If recent earnings growth continues, or just doesn't falter, and 10-year Treasury yields fall below 3.50% to, say, 3.20%, "the present value of future earnings looks better and gives stock investors a reason to throw money at the market," he said. In recent rallies, including off the October lows, bond yields rose and effectively short-circuited equities. But that's not happening currently, although the price of the benchmark 10-year note fell 1/32 to 100 27/32 Thursday, its yield rising to 3.53%. The 30-year bond, however, soared another 17/32 to 114 5/32, its yield falling to 4.48%. A couple of thoughts: One, Gallagher believes Treasury yields are being "artificially reduced" -- including by Fed buying of long-dated Treasuries, as discussed
here -- and that these are "short-term technical factors," rather than "fundamentally driven" reasons to buy shares. Second, Gallagher, who is generally cautious/bearish, believes this is a "rally within a bear market." He may not be buying tech and biotech and other speculative names, but others are.
The Philadelphia Stock Exchange Index rose 1.9% and Intel gained 1.7%, despite those aforementioned comments from Barrett and more caution from CFO Andy Bryant intraday. Meanwhile, the Merrill Lynch Biotech Holders Trust ( BBH) rose 2% and the Philadelphia Stock Exchange TheStreet.com Internet Index (remember that?) gained 1.7%. Finally, another 20 over-the-counter shares that trade under $10 rose at least 20%. Momentum begets momentum. It will be interesting to see how traders react Friday to postclose news from Dell ( DELL), whose fiscal second-quarter results were in line with expectations.
In an attempt to explain why that data deluge didn't weigh on shares, I'd like to circle back to Gallagher's rationale for getting more bullish. In a nutshell, he's saying market participants are putting their faith in the Federal Reserve, and that the central bank is going to get its way. What the Fed wants right now is lower yields of long-dated Treasuries (in order to spur another refi boom), a weaker dollar (to combat deflation) and higher equity prices. (The dollar rallied Thursday, especially vs. the euro, although the logical inverse of "weak dollar = good for stocks" did not apply.) "In a scene reminiscent of the previous bubble, Greenspan has basically said, 'yields will not rise, play the steep yield curve and you will not be allowed to lose,'" Gallagher wrote. "Bond investors are listening, equity investors may have to. It is a dangerous game, but for now it's safe to go back in the pool." Judging by recent history, it seems to me that the most dangerous game over time is betting that >Alan Greenspan -- anyone, for that matter -- can really "drive" the economy like it's a finely tuned sports car.