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Week's Rally Still Leaves Some on the Sidelines

Jeff Cox, |Special to CNBC.com
Friday, 18 Jul 2008 | 1:36 PM ET

This week's Wall Street rally has encouraged at least some investors to come in off the sidelines, but not as many as the sharp gain in stocks might suggest.

Rather, pervasive fears over what lies ahead for the American banking system and other

aspects of the economy have investors hesitant to jump back in based on a quick surge that seems not to be based on market fundamentals.

Still, as the major indexes posted gains of more than 2 percent on the week, some brokers and investment advisers are seeing an uptick in business.

"We're definitely seeing (more people coming into the market). I don't think it's the smart thing necessarily to do," said Matthew Tuttle, president of Tuttle Wealth Management. "We're rallying on news that is not as bad as we thought it was. It's still bad. I think it's very hard to sustain a rally like that."

Those who have seen more business aren't expecting it to last, with Tuttle calling the mood among investors "cautiously optimistic" and trading Friday lackluster at best.

TD Ameritrade reported a faster pace of trading in July but warned that economic pressures probably would knock some momentum off the pace. The online brokerage said earlier this week that it has averaged 321,000 client trades per day in the month, up from 297,588 in June.

But Chief Executive Joe Moglia said "a couple of very, very big up days" in the month probably foreshadow a slowing in trade ahead. (See more of his comments in the video)

"Entering the summer season with everything going on in the economy, we would be more conservative than suggesting that this number is going to hold up over the span of the rest of this quarter," he said on a conference call with investors and media.

Getting Inside Electronic Trading
Details from the Global Exchange and Electronic Trading conference, with Joe Moglia, TD Ameritrade Holding Corp. CEO and CNBC's Dylan Ratigan

Traders on the floor also noted an upswing in business, but said there still is hesitation over what bad news might loom ahead.

"There is a lot of money on the sidelines waiting for good news today," Jack Bouroudjian, a principal at Brewer Investment Group, said on CNBC. "Citigroup (earnings) news was good news, what's happening to oil is good news. If we could only get the dollar to stabilize, that would really help."

Banks the Main Obstacle

Investors are concerned about surging energy prices and the continuing drop in real estate values, but perhaps the most troubling aspect to those still waiting to get back in the market is uncertainty over the financial sector.

Even though the majority of bank earnings for the second quarter have beaten Wall Street estimates, the bar has been lowered dramatically--to the point where Citigroup's $2.5 billion loss reported Friday was treated as good news.

"By far the single most important factor to the market today is the financial crisis, not oil and not housing," said Peter Tannous, president of Lynx Investment Advisory in Washington, DC. "The reason for that is we will learn how to live with higher oil prices, housing will hit a bottom one of these days and we're probably not too far off from that. The financial crisis is the source of greatest concern because we don't know how bad it is."

As a result investors are "scared and understandably so," says Tannous, who says he has not seen a big upswing in business and doubts one will come until some certainty returns to the market.

Those pushing the market up primarily have been short-sellers looking to capitalize on rising stock prices to cover bets on other areas moving lower, said Peter Miralles, president of Atlanta Wealth Consultants. He thinks some of the movement also was generated by tough rhetoric in Washington that the White House is ready to get take action against surging energy prices.

Miralles said he's seen a bit more activity and he has bought an exchange-traded fund for his clients, the ProShares UltraDow fund, to take advantage of the upward movement with a broad play.

"We bought those because we were unsure where the leadership was going to go," he said. "We think there's good value in the market but it's going to take more than what we've seen in the last two days to get momentum. We need more. We need oil to crank down lower than $100 and we need another couple quarters of financials (earnings) to really found out what surprises are going to be out there."

Tannous also is playing funds to try to take advantage of current market conditions without getting caught up in any hype about a protracted rally.

He is strong on energy and gold, with a play on the Vanguard Energy Fund to take advantage of oil's rise.

"When you look at portfolios today compared to a decade ago, the one difference is that everybody should have separate asset classes devoted to energy and other commodities," he said. "This is not what you would have done in the past, but today energy, gold, should be part of everybody's portfolio, as much as 20 percent."

But that doesn't mean investors still shouldn't be carrying stocks, because when the rally becomes real there will be plenty of money to be made, Tannous said.

"They've got to have equities," he said. "This thing will turn around, and when it does turn up it will be violent."

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