The Main Driver Behind the Market Rally
With all the big money movers on vacation, summer is typically a slow time for the market. And remember, you’re supposed to “sell in May and go away,” right?
As Louis Basenese predicted, that wasn’t a winning strategy this year. From the beginning of June to the end of July, the market’s gone mostly straight up.
In fact, despite the uncertainty in the global economy, defensive stocks (which are usually the go-to investments during times like this) have actually underperformed the broader market.
So where did this rally come from? After all, employment numbers have been muddled and global growth has dragged.
Not to mention, investors have been yanking billions of dollars out of the stock market.
According to the Investment Company Institute, investors pulled $3.7 billion out of stock market mutual funds. That number jumps to $76 billion when you look at all of 2012.
Where’s the money going?
So if money’s being yanked out of the market by individual investors, what exactly could be pushing this rally?
You see, it turns out that institutions bet big on another market dip over the summer, too.
As a result, the HFRX Equity Hedge Index – which measures the performance of hedge funds that are focused on stocks – is up only 2.6% on the year, compared to 14.2% for the S&P 500.
Obviously keeping their money out of stocks was a disastrous decision. And since funds realized early on they’d fall behind on performance numbers, they began jumping back into the stock market.
In other words, we can thank hedge funds trying to salvage their reputations for much of the market rally.
And as managers continue to chase decent returns, they’ll continue to drive the market higher. As a result, you can expect more institutional investors to follow suit, boosting the market even more.
Tack on all the “cash on the sideline” that individual investors have pulled from the market, and this rally has quite a ways to go.
Rest assured, we’ll be along for the ride.
Ahead of the tape,