Where is the big relief rally in stocks that so many strategists have predicted and even more investors have been pining for? As with all the any-minute-now rebounds since the stock market peaked more than three years ago, this one is AWOL.
It is especially exasperating to many investors that the stock market has shrugged off not only the quick US military victory in Iraq but also the reports on Friday of an increase in consumer confidence and retail sales in March. For the week, the Standard & Poor's 500-stock index fell 1.2 percent; for the year, it is down 1.3 percent.
Before the war, many market pundits had reasoned that the prospects of a conflict were weighing on stocks. Once the successful prosecution of the war became obvious, many of these people predicted that shares would surge. Instead, they have struggled.
It brings back memories of January 2001, when Alan Greenspan started lowering interest rates. Remember the soothsayers who noted that stock prices were always higher six months after a series of interest-rate cuts began?
Stock market strategists are often wrong, of course, and not only because they are human.
Many are also in the business of generating trading commissions for their firms. Such commissions are far more likely to come from bullish pronouncements than from advice that investors remain on the sidelines or bet against rising stock prices.
Investors are understandably interested in an intelligent assessment of where the market might be headed. But rather than rely on big-name strategists for a view, investors should look at the expectations of large institutional investors, based on their actual bets made in stock-index futures.
These derivative securities allow investors to bet on where they think the indexes, like the S&P 500, are going. RiskMetrics, a financial analytics company in New York, has analyzed S&P futures prices and determined how many investors are moderately positive, wildly optimistic or outright negative about the overall market for the next three months.
At the moment, for example, while many strategists are calling for a hefty rally, only 19 percent of futures investors have bet that the S&P will rise more than 10 percent. Most of these investors -- 62 percent -- appear to believe that the index will trade in a range of plus or minus 10 percent. Some 14 percent have wagered that it will be 10 to 25 percent lower in three months.
Professional traders in the government bond market use a similar tool -- federal funds rate futures -- to assess the thinking among investors about where interest rates might go. Bond traders either bet alongside or against these expectations.
Investors in stock-index futures can be wrong, of course. But a look at recent history shows that a majority has often been correct. For instance, in early January 2001, while the pundits were pounding the table for stocks, 54 percent of stock-index futures players had wagered that the index would remain in a range of plus or minus 10 percent. And 12 percent had made bets that the index would fall as much as 25 percent within three months. By the end of March, the S&P had fallen 9.6 percent.
At the end of November last year, as investors bid up stocks on the glimmers of an economic rebound, 60 percent of stock-futures investors had bet that the rally was unsustainable. They were right.
"This is an assessment of what investors in the S&P futures market believe, so it gives you a real feel for the actual money that is being bet on where the market is going," said Michael Thompson, a risk strategist at RiskMetrics. "It is the voice of the market rather than the voice of an individual strategist."
And considerably more credible.
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