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Counter-Intuitive Action that Made Sense

September 14, 2013 | About:

Poor Economic Data: Big Gains for Stocks

The Wall of Worry has never been more climbable.

Last week revealed an unexpected plunge in the University of Michigan Consumer Confidence Index http://www.bloomberg.com/news/2013-09-13/consumer-sentiment-in-u-s-falls-to-lowest-since-april-1-.html .

Friday also featured higher than project wholesale price increases (PPI) http://www.bls.gov/web/ppi/ppi_dr.pdf and weaker than expected retail sales data http://www.census.gov/retail/marts/www/marts_current.pdf.

If you knew in advance that all three of these economic indicators would register negatively you would likely have positioned your portfolio for a down-side move. Instead, Friday saw the DJIA move 75-points higher. Perhaps Mark Twain should have been a technical analyst.

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The week ended on, ultimately lucky, Friday the 13th turned out to be the second largest winner of 2013 YTD. Remember all the angst last fall leading up to the ‘Fiscal Cliff’ negotiations? There was plenty of uncertainty and a palpable fear of higher taxes and weakening business conditions.

Those who ‘knew’ all that were major sellers last November and December at what turned out to be some of the worst prices of 2012. Worse still, there has been no significant pull back since to allow for re-entry at anywhere near where that wholesale dumping of stocks took place.

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All that money on the sidelines is still actively buying the dips in an attempt to catch up with the 16% - 26% gains of the major indices since this time last year. Those who missed the rally are desperate to see a major sell-off even as they prevent it from happening by buying on every minor regression.

June’s ‘taper anticipation’ decline bottomed at about 6%. Most sideline players missed that entry point as they greedily waited for a 10% - 20% decline that never happened. August presented four straight weeks of negative action and better pricing for new money. Most traders failed to buy into that opportunity as well.

Morningstar data shows only modest YTD 2013 net inflows into US Equity mutual funds and a 12-month negative net outflow of more than $31 billion. Mom and Pop pulled out more money during last fall’s turmoil, when shares were cheap and getting pounded, than they contributed in all of 2013. They insisted on selling low and buying high.

The net inflow in August was trivial, perhaps in response to the market getting cheaper four weeks in a row. Stocks are the only consumer offering that people seem to want less when you mark down the asking price.

Detroit’s bankruptcy and muni-bond default has scared more than $31 billion out of tax-free bond funds so far this year. Once again, investors waited for major price declines before pulling their money out.

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We remain in the TINA (There Is No Alternative) environment. Bonds look unattractive and vulnerable. Bank CDs and Treasury bonds offer return-free risk, rather than risk-free returns.

Gold and silver have been disasters for two full years. Their values are impossible to pinpoint. Real Estate is illiquid, heavily taxed and burdensome to maintain. Ever expanding QE programs (A.K.A. money printing) make holding fiat-based currencies riskier by the month. Equities have never looked better on a relative basis due to ZIRP and QE.

Knowing the world’s, very real, problems only served to prevent otherwise smart people from participating in a great year-long rally. Stop trying to call the market. Put your money into the one asset class that has a fighting chance to keep up with inflation and taxes.

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Disclosure: The bulk of my own net worth is invested in equities, I own no bonds.

Click here to see my model portfolio and more of my views on Value Investing http://marketshadows.com/virtual-portfolios/

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.6/5 (13 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 7 months ago
Good discussion. While many might argue on the overall market value today, I thought this comment was very insightful:

"All that money on the sidelines is still actively buying the dips in an attempt to catch up with the 16% - 26% gains of the major indices since this time last year. Those who missed the rally are desperate to see a major sell-off even as they prevent it from happening by buying on every minor regression."

As they say, bull markets climb a wall of worry.

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