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Wednesday, April 15, 2015

Daily update 4/15 Interesting article on asset manager's problems

Yet another almost strong day.

SPX hit the downtrend line and got above Monday's high for a while.  However, late day selling took it back below that high.  Breadth ended the day +62%.  For most of the day it was around +68% so that late day selling took it down quite a bit.  There were 123 new highs.  Up from yesterday, but just back in the range it has been on this rally.  The volume increased quite a bit.  I am not sure that is a good thing since we failed to take out resistance.  We had strong breadth and strong volume and still only managed a .5% gain on the day.  If the big boys were piling in we should have easily been up over 1%.  Maybe the bulls will keep on pushing albeit in a lethargic way.

The futures got back to a green bar late in the day.  However, the ADX looks much like it did back in March.  There is no strong trend into this high.  In other words it might not take much for this market to reverse here. 

There is likely to be resistance here all the way up to the high of 2119.  This has been a very lethargic bounce from day one so we will see what happens.  It looks like an absence of selling more then heavy buying.  That means a selling catalyst can dramatically change things.  The transports remain relatively weak as they were barely positive today.  The small and mid cap indexes blasted out to new highs.  They won't stay there unless SPX gets up there also.  In the end everything winds up going where SPX goes.  Breaking today's low might usher in some selling.  Breaking yesterday's low is likely to open some floodgates.  Lets see if the bulls still feel like pushing higher.

This is a pretty good read.  Market Overview Q115  There are not many articles I read completely through that don't have charts, but this is one.  Some interesting snippets.

In such an environment, John Dizard's blunt and objective evaluation of the markets comes through like a breath of fresh spring air. He recently noted in the Financial Times, "The policy regime has now made it mathematically impossible for fiduciaries [e.g., investment advisors and pension managers] to meet the beneficiaries' future needs through the prudent buying of securities." 

On the other hand, by constraining his assessment to "prudent" buying, Dizard also highlights an investment conundrum: investment advisors must either resort to imprudent and speculative buying of securities to try to meet their clients’ needs or face the music that there will be a shortfall. 

According to Jones, "the business risk of asset managers acts as strong motivation for institutional herding and 'rational bubble-riding'." Zerohedge clarifies the implication, "Simply put, it can be entirely rational—from the perspective of business and compensation risk—for asset managers to knowingly ride bubbles because of benchmarking and the short-term performance appraisal periods often imposed on asset managers by asset owners." Jones concludes that, “procyclicality could intensify as institutional assets under management continue to grow.” 

So one consequence we seem to get from an ever-growing investment industry is more herding which causes bigger and bigger swings in the market. Indeed this may go a long way in explaining why stock prices are still going up despite high valuations and deteriorating internals. It’s not “unsophisticated” individual investors chasing performance; it’s “sophisticated” institutional investors riding bubbles for fear of losing their jobs if they miss out. Insofar as this is the case, it would represent a massive deviation from what most investors want and from what Howard Marks described in his 2006 memo, "Dare to be Great."  

Think about those last two paragraphs for a minute.  The huge swings up and down we have seen since 2000 may be the new norm.  There is some other greats tidbits in that article.


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