The markets are moving higher simply because the news is improving. Many investors invest with the ‘Headlines”. If something is better than expected, then they believe stock prices should be higher than before the better news was announced. This is Momentum Investing!
Recent history shows that Momentum Investing has come to dominate equity markets since 1995 when Hedge Funds exceeded ~$100bil in assets.Today Hedge Funds control some $2 trillion in assets!
In the recession months equity markets find their lows due to buying dominated by Value Investors such as John Castle, Wilbur Ross and Warren Buffett. Their buying is detected by trend followers some of whom follow the Value Investor lead. This is how I have observed market lows are created. Later in the investment cycle the market pricing dynamic changes entirely. Once economic headlines turn more positive, Hedge Fund Momentum Investing becomes a major positive driving force.
In the past two market peaks Hedge Fund buying lasted till the economic news turned negative. When the news turns negative, Hedge Fund positions turn from being net long to being net short. Even though the investment markets have had strong performance since March 2009, it is only recently with the markets passing through the ‘sell in May and go away’ period (May-October has typically displayed market weakness with many on vacation) with a decent price expansion, i.e. S&P 500 ($SPY) has risen from $1,597 in May to $1,750+ today.
The mantra for Momentum Investors is ‘The trend is your friend.’ It is my opinion that Momentum Investors are now pushing the market higher on better headline news. This should continue till the economic news turns negative.
The data released today indicate that economic trends continue as before. If the past repeats, then we may see the equity markets significantly higher 4yrs-5yrs from now.
(Fund those Roths!)