This is a market Vin Diesel would love. It's so "The Fast and The Furious." It's actually more like "2 Fast 2 Furious," but I know Vin wasn't in the sequel. But like these fun flicks, the stock market last week seemed like a drag race on steroids. It may make it past that oncoming train but, like all drag races, speed eventually kills.A few months ago, stocks were highly overvalued. By the end of last week, stocks were way oversold. What made the market surge so uncontrollably? There was too much pessimism and too much cash. Hedge funds were underinvested, and there were lots of investors who, in Wall Street jargon, were short, meaning they'd made picks that pay off when stocks decline. At that point, the least bit of good news sparked a huge rally.
Rallies like this always make me nervous and usually end badly, like teenagers drag racing to beat a train. This is not the way markets turn. Rather, the big move was largely about money managers looking to cover their butts before they have to report year-end numbers to their clients.
The same managers recently predicting gloom and doom are suddenly rushing to invest as much as they can into the growth darlings they'd just been selling or shorting. They are all playing chicken with each other and with their investors because they don't want to confess they missed the rally that they didn't expect.
Good markets turn slowly, like an ocean liner pulling out of a pier. Stocks stop going down, build a base, move up slightly, pull back to a base and then, a few months later, break out to the upside.
Bad markets act like teens zipping down a deserted street. They race in one direction, slide into a skid turn, then race back. They have no conviction. You don't want to be in their way, but neither do you want to race with them.
Historically, the most violent rallies occur in bear markets. The pros are sitting with lots of cash. Someone says something positive, and the market takes off. But these rallies usually end badly because the people buying into them have no conviction and because the fundamentals haven't gotten better.
A few months ago, the Fed cut interest rates and a wild rally ensued. Of course, a month later, the market was lower than it had been before. Now many investors are pushing their lead feet on their accelerators because the Fed made plenty of noise about cutting again.
My guess is this rally could last a few more weeks as underperforming money managers attempt to save their 2007 performance records. However, I wouldn't get greedy. When I see a rally this wild, I always try to take profits because I don't believe investors can beat a train to the crossing without crashing their portfolios.
Source: New York Daily News - December 3, 2007 - Peter Siri
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