Recs

10

Are Bulls Buying at the Market's Top?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

In a script eerily reminiscent of the movie Groundhog Day, the Federal Reserve decided once again to try to coax investors to ditch their bond holdings in favor of stocks and other risky assets. Once again, investors have reacted with Pavlovian fervor, bidding up U.S. stocks to four-year highs and helping some other beaten-down asset classes to turn around and move sharply higher.

In the past, though, the good times that the Fed and its partner central banks around the world created haven't lasted as long as policymakers may have hoped. As mainstream investors pile into stocks based on the Fed's moves, those with more experience have to wonder: Is this the contrarian signal that many have been waiting for to bring the three-and-a-half-year bull market to an end, or could the masses actually be right to buy this time around?

Waiting for a long time
Contrary to what you may think from watching the stock market's moves so far this month, the conditions that have led investors to prefer stocks to bonds aren't new by a long shot. For years, rock-bottom interest rates have given investors every incentive to shift out of low-yielding income investments and move into stocks and other assets with higher return potential. With the entire S&P 500 index having an aggregate dividend yield in excess of the 10-year Treasury, income-seeking investors have had to do an about-face in the way they perceive risk.

Until now, though, those conditions didn't produce substantial results. With a few bumps in the road, the 10-year yield has moved steadily down from almost 4% at the beginning of 2010 to the 2% range in the middle of last year, hitting 1.5% early this summer.

This time around, the Fed may have a more significant impact. Already, bond yields have risen about a quarter of a percentage point. And as Barron's reported over the weekend, assets under management at major stock ETFs have soared. For the SPDR S&P 500, nearly $12 billion in new investment has come in just in the past month.

Nor is the wave of assets restrained to U.S. stocks, as Vanguard Emerging Markets (NYSE: VWO  ) has seen $1.7 billion come in. Meanwhile, a big turnaround in the precious metals markets has reawakened interest in bullion ETFs SPDR Gold (NYSE: GLD  ) and iShares Silver (NYSE: SLV  ) , with the gold ETF pulling in $1.6 billion in new assets.

In the bond market, more investors are placing bets on a retreat. The Fed's move brought an explosion of interest in ProShares UltraShort 20+ Year Treasury (NYSE: TBT  ) , whose volume surged to three times normal levels the day after the Fed's announcement and whose shares climbed more than 5% that day. Meanwhile, even though interest-rate-sensitive Annaly Capital (NYSE: NLY  ) and its fellow mortgage REITs have responded fairly well to QE3, Annaly's falling dividends make it clear how tough it is to keep earnings up given the current state of affairs with mortgage-backed bonds.

What tomorrow may bring
Ordinarily, with stocks at multiyear highs, it would make sense to expect a pullback, especially when investors are using ETFs to plow their money into the market. But this time around, the situation isn't nearly as clear-cut.

For one thing, investor sentiment isn't terribly bullish. According to the AAII's most recent weekly survey, bullish investors outnumber bears 37.5% to 33.8%, but those figures are on the whole more pessimistic even than the long-term average readings. It's hard to argue that investors are irrationally exuberant when they don't seem particularly exuberant at all in comparison to past figures.

Also, fundamentals have helped support the market's move. Earnings have been on the rise ever since the recession, and although analysts have repeatedly expected S&P 500 earnings to top out, the second quarter still managed a mild gain. Even if earnings do fall as expected in the third quarter, they're still high enough that multiples don't seem ridiculously high.

Don't panic
Contrarian indicators can be extremely useful for smart investors, but the herd isn't wrong all the time. Even if you think the market will eventually have to give up its gains, today's market doesn't seem to have the all-pervasive euphoria you'd expect at a market top. Stocks could therefore move quite a bit higher before finally giving bears the correction they've been waiting for.

In the meantime, bonds may be on the outs, but Annaly isn't giving up hope yet. Find out how the mortgage REIT is responding to changing conditions by reading the Fool's premium report on Annaly Capital. With a year's worth of updates included free, you've got no excuse not to click here and get started today.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

Fool contributor Dan Caplinger worries that he's not scared enough of the market's big advance. He owns shares of Vanguard Emerging Markets. The Motley Fool owns shares of Annaly Capital. Motley Fool newsletter services have recommended buying shares of Annaly Capital and writing puts on ProShares UltraShort 20+ Year Treasury. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gives you a great view.


Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2028527, ~/Articles/ArticleHandler.aspx, 9/1/2014 10:03:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 3 days ago Sponsored by:
DOW 17,098.45 18.88 0.11%
S&P 500 2,003.37 6.63 0.33%
NASD 4,580.27 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/29/2014 4:00 PM
NLY $11.90 Up +0.05 +0.42%
Annaly Capital Man… CAPS Rating: ****

Advertisement