The 18 percent gain in the Standard & Poor's 500 Index the past eight weeks is likely to unravel, according to David Webb of Shaker Investments Inc. That suits him fine.
Webb, who oversees a US$1 billion portfolio in Cleveland, has a mix of "long" and "short" positions: He owns some stocks outright, and has borrowed others and sold them in a bet they will fall. The balance has shifted to short from long as the rally has made stocks such as chipmaker Xilinx Inc, network equipment company Juniper Networks Inc and retailer Bed, Bath & Beyond Inc expensive enough that they seem poised for declines.
"You have to buy into the declines and sell into the rises," said Webb, though this is the opposite of what most investors do. "In this kind of market, this is the only way to make money." The rise of stocks from their three-year lows reached after the Sept. 11 terrorist attacks marks the third rally this year.
Each has been sparked by optimism Federal Reserve interest-rate cuts will help the economy, and corporate profits, rebound.
Market volatility
Investors extended the current advance this week, boosting the S&P 500 1.6 percent. The index has climbed in six of the past eight weeks and is now 4.2 percent higher than prior to the attacks.
The NASDAQ Composite Index rose 3.8 percent this week and has rallied 33 percent from its Sept. 21 lows. The Dow Jones Industrial Average jumped 2.7 percent on the week and has gained 20 percent since Sept. 21.
The biggest gains came Tuesday, as Afghanistan's Northern Alliance took control of the capital, Kabul. Last Monday, shares initially declined after an American Airlines jet crashed in New York, killing the 260 people on board and five more on the ground.
Stocks rebounded as investors became convinced the crash wasn't caused by terrorists.
Investors said the Taliban's retreat in Afghanistan eased concern that the US response to the attacks on the World Trade Center and Pentagon might disrupt the economy.
"We're taking worst-case scen-arios off the table," said Richard Cripps, chief market strategist at Legg Mason Wood Walker in Baltimore.
Concern that the economy might not respond to the Fed's rate cuts has also receded, said Cripps, who expects the S&P 500 will reach 1,300 by the end of the first quarter of next year, a 14 percent gain from its current level.
"There's been a fairly euphoric sense that it's all going to come out with a strong economic recovery in the new year," said Timothy Leach, chief investment officer of Wells Fargo Private Asset Management, which oversees US$76 billion in San Francisco.
While Leach says the stock market has "come too far too soon," he isn't as pessimistic as Webb about the coming months.
Stocks won't return to their late-September lows, Leach said.
"Historically speaking, three months before the end of a recession, the stock market tends to have a surge, a pretty good one," Leach said. This may be such as rally, he said.
Webb's view is that "what we've had is a mini-bubble courtesy of the Fed." The central bank has cut its benchmark overnight lending rate three times since Sept. 11 and has also injected money into the banking system.
Chips lead gains
Webb said his fund, which has gained 34 percent after fees in the first three quarters this year, has swung to short from long several times this year. It is now weighted as far toward short selling as it ever gets. The value of his short positions currently exceeds the value of owned stocks by about 20 percent, Webb said.
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