Monday, January 21, 2013

Investors Are Frightened, But Still Fightin’

“Investors are scared but still chasing stocks” say the folks at Yahoo Finance — and they’ve nailed it. Stocks squeezed out another tiny gain yesterday, making 12 up�sessions out of the past 15�for the S&P.

Is this an impressive showing? It certainly is, especially given the fact that the market had a good excuse to sell off yesterday when the weekly�count of�initial jobless claims came in higher than the consensus expected (399,000 — up a sharp 23,000 in the week ended Jan. 7).

It’s even possible that the “scared” investors who are buying here will eventually make money.

But you have to ask: What are they scared about? If they were genuinely afraid of the economic outlook, they wouldn’t be buying.

I suspect, instead, many of the buyers these first two weeks of January have been professionals (especially hedge-fund managers) afraid of losing their jobs if they fall behind the marquee indices in 2012 — as�many pros did last year.

Indeed, the average hedge fund, according to Greenwich Alternative Investments, lost 4.3% in 2011, while the S&P (with dividends reinvested) posted a 2.1% gain. So you can see why the hedgies are running scared. You don’t get paid millions to lag a passive index by 600 basis points!

At some point soon, this fear-motivated buying will dry up. Then, as the market pulls back, we can assess whether the post-Oct. 3 rally still has legs.

A mild, orderly dip of 3% to 4% on the S&P, over�a span of two or three weeks, would point to a bullish resolution. If that scenario unfolds, I’ll step up to the plate and do some buying again.

For now, the market is severely overbought from both a short-term (five to 20 days) and an intermediate-term (two to six months) perspective. It’s time for a breather, although I don’t yet see enough downside to justify adding to my hedges.

A Quick Word on Housing

I got stopped out of my short position in Lennar (NYSE:LEN) on Wednesday. Frankly, the�meteoric rise�of the homebuilder stocks in recent weeks staggers me. As a group, they’ve gained back essentially all their losses dating back to the market’s April 2011 peak.

Housing starts are down 70% from the 2006 high and have only crept back to the same level as the April 2010 false bottom. It’s a little nutty for the homebuilder stocks to be up this much, but I guess Wall Street is doing a lot of nutty things these days.

If housing were really about to boom again, mortgage REITs like Invesco Mortgage Capital (NYSE:IVR) should be taking off, too. Come to think of it, perhaps mortgages are, in fact, due for a lift in the weeks ahead.

Barring another nosedive in house prices, the value of IVR’s mortgage portfolio should be bottoming out right about now. So should the REIT’s dividend. At a current annual run rate of $2.60 per share, the stock is yielding over 18% — enough to�put a floor under the share price.

IVR rates a buy at $15 or less, and only if you can accept sizable fluctuations in your principal.

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