Source: shutterstock.com/Kolpakova Daria
Even though stocks rose significantly after Wednesday’s FOMC meeting, the bears remain in control.
How do I know? The important thing to remember is that most of the money that moves the market isn’t driven by short selling. Instead, it is common for large sums of money to remain invested long-only. When institutional investors are bearish, they place positions in the low-beta defensive part of the market. They also allocate more funds to bonds.
Currently, defensive sectors of the stock market, such as utilities and consumer staples, continue to outperform. In other words, the recovery over the past 72 hours does not seem to be underpinned by a significant decline in defensive stocks.
This is how bears are controlled. Not in terms of market direction, but in terms of allocation and what they’re buying. The fact that utility stocks are not weak suggests that institutional investors remain nervous.
So we’re seeing a resurgence of the euphoria around paychecks and the idea that the Federal Reserve won’t raise rates. On the other hand, big money remains a concern. This is supported by the fact that gold prices are not selling off as stock prices rise.
I still think the near-term situation remains risky, and the behavior across markets is largely consistent. Japan has intervened twice in the foreign exchange market, and there is a significant risk that a reverse carry trade will be imminent due to movements in the yen.
In other words, nothing has changed here. I think next week could be an important week. If utility stocks and gold prices fall, there is a possibility that the risk-off short-term setting will be removed. Otherwise, the market will just swallow everyone up as volatility could spike again.
Which way would you go? We’ll let you know in two weeks.
On the date of publication, Michael Gade did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer and are influenced by InvestorPlace.com. Publishing guidelines.
