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Once upon a time, the stock market used to go down every once in a while. Sometimes it even declined two days in a row. To be fair, it's not so surprising the market has been on an elevator straight up since Federal Reserve Chairman Ben Bernanke's now infamous speech announcing the second round of quantitative easing. Bernanke credits the program for having boosted asset prices -- and more specifically, the stock market.
For the buy-and-hold crowd, the almost daily injections of capital from the Federal Reserve Bank of New York's Permanent Open Market Operations program have created an apparent liquidity floor under the market. Though Bernanke has neither pulled the punch bowl away yet nor indicated that he won't spike it further via a future QE3, investors should be wary of increasing complacency. Markets don't go up forever, and I believe some signs lead to caution at this stage in the rally.
It used to be that the only things certain in life were death, taxes, and Cal Ripken starting at shortstop for the Baltimore Orioles. However, we're getting close to adding another to the list: If it's a Monday, the stock market is most likely going to go up. The S&P 500 has now risen on eight of the past nine Mondays (as well as on the day after the Martin Luther King Jr. holiday). A similar phenomenon occurred from late 2009 until after the flash crash in May 2010. From the end of September 2009 to May 10, 2010, the S&P 500 was up on the first trading day of the week 27 out of 33 times (again with some holiday-shortened weeks).
No one can be quite sure exactly what the proximate cause of this Monday levitation is. But two popular buzz phrases I've heard used to describe it are "merger Monday" and "mutual fund Monday." The first refers to the fact that many M&A transactions are usually completed over the weekend and announced on Monday. This is usually seen as a bullish sign of economic recovery and of corporations believing potential target stocks are cheap.
However, two things concerned me about this most recent merger Monday. In one deal, private equity firm Clayton, Dubilier & Rice bought out Emergency Medical Services (NYSE: EMS ) for $3 billion, which works out to less than the value implied by the stock's closing price the previous day. Similarly, Hughes Communications (Nasdaq: HUGH ) was also bought by EchoStar (Nasdaq: SATS ) at a discount to its Friday share price. M&A activity is always good to see, but perhaps these discounted acquisition prices, which I refer to as take-unders, point to a market that has become a bit overheated.
Mutual fund Monday
As investors become more confident and allocate more assets into equities, mutual fund managers must put this capital to work. Some believe these managers do a lot of their buying at the beginning of the week, so the resulting buying pressure creates the "mutual fund Monday" phenomenon.
However, another worry as the market continues its ascent is the dichotomy between company insiders and retail investors. Simply stated, a Reuters headline from this weekend read: "Buy that dip, baby!" The headline alone is enough to rattle the contrarian in me, but so is the fact that $23 billion has moved out of bond funds over the past three months. This marks the longest outflow streak in the past two years. And $16 billion of these outflows were directed into equity funds, as retail investors are becoming more and more confident in stocks. After months of equity outflows and bond inflows, I'm wondering: Where were all the ordinary-investor bulls when we were closer to the beginning of this bull market run?
As retail investors appear to be getting more interested in stocks, company insiders are doing just the opposite. Last week, according to figures compiled by Bloomberg, insider selling hit its highest level of 2011, while there were only eight companies in the entire S&P 500 index reporting insider purchases. Insider selling was rampant across the gamut of S&P 500 stocks, totaling more than $1.3 billion in sales -- led by $417 million worth of shares in Microsoft (Nasdaq: MSFT ) and $268 million in Nasdaq OMX Group (Nasdaq: NDAQ ) . Juniper Networks (NYSE: JNPR ) insiders also sold $65 million of stock last week, yet the stock has climbed 12 trading days in a row.
Excluding a single $20.2 million purchase by News Corp.'s (Nasdaq: NWS ) Rupert Murdoch, company insiders only bought $1.2 million worth of shares last week -- not exactly a vote of confidence for the idea that the market is cheap at these levels.
It's not always this easy
I'm not advocating that these divergences of opinions or the lackluster merger Monday takeovers mean it's time to sell all of your winners, especially when Ben Bernanke has your back. However, I believe the old mantra of "buy low and sell high" sounds about right as we approach a 100% gain for the S&P 500 from the March 2009 bottom. At this level stocks appear pretty lofty, and I don't think anyone has ever lost a dime taking profits. Be careful out there!