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Posted 8/8/2005
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Call this the anxiety rally
With the market up a bit this year, performance-driven money managers need to increase their equity exposure. Their buying is fueling a rally -- and raising the level of risk.
By Bill Fleckenstein
Running a short portfolio mandates a lot of maneuvering. Sometimes it means covering one's shorts and heading for the sidelines. (Or, to quote the headline of my April 22 Market Rap: "Bobbing, Weaving, and Flinching on the Short Side.")
The sidelines are, in fact, where I have stayed to a large degree ever since April.
At that time I expected a rally, which would be helped by a decline in the price of oil. (Oil subsequently did see a couple of minor setbacks -- but nothing really meaningful.) I also thought that there would be some indication that the Federal Reserve will start retreating from its rate hikes because of more signs of an economic slowdown.
Thus far, there's been little in the way of data to support that idea, though last week's poor retail-sales figures were noteworthy. The housing ATM continues to keep the economy moving ahead. Similarly, the Fed has not yet shown any signs of backing off.
Which makes the rally -- which has reached the higher end of my expectations -- all the more dangerous, since what has changed from April until now has been not much of anything, other than psychology.
Retrofitted to rally
I believe that the reason for the rally has been the following: As we exited the first-quarter earnings season, we headed into the no-news period, and the market lifted. (As I described it on April 22: "The minute bad news stops, at least in the tech sector, bulls come out in force and start conjuring up stories about how everything's going to get better.") In addition, the recently announced earnings for the second quarter were OK, with few companies issuing warnings.
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But, an even more important factor has brought us to where we are now -- the underlying performance anxiety among the OPM (other people's money) crowd. With the S&P 500 Index ($INX) and Nasdaq Composite ($COMPX) up on the year, the Dow not far from being positive and many narrower averages doing even better, I would imagine that performance anxiety is forcing more and more of these money managers to up their equity exposure. And that anxiety, in my opinion, is the driving force for the rally.
Could the rally end here-and-now-ish, or will it gather an even bigger head of steam before coming undone a bit further down the road? The answer is not knowable -- though the fact that negative preannouncements from Tech Data (TECD, news, msgs) and Analog Devices (ADI, news, msgs) were cordoned off last Wednesday as company-specific events argues that the rally probably has more life left.
Ineluctable agita
However, that uncertainty does not change my view of the ultimate outcome. I believe that the housing market is starting to spin its wheels and that a slowdown is beginning to surface in many areas. Of course, when trouble takes hold in the real-estate market in a meaningful way, that will be the end of the housing ATM's ability to power the economy. Between now and then, should the bullish contingent of the OPM crowd become even more lopsided, it will only add fuel to the downside fire.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money.
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