Trader Talk

Small Caps, Financials Lead Market Rebound


Bears are besides themselves today. One wrote to me: "If you told anyone that the market would have made a new high with gold, oil, dollar, falling home prices, etc...there would be many takers on that bet." He's right--there have been many takers on that bet--and they have been wrong. The important question is, is there anything different today than there was on Friday?

There are, though bears will argue that they are minor:

1) Start of the quarter usually means a modest pop in prices as new money comes in.

2) CFTC reported on Friday that there were big drops in net short positions in the S&P futures contracts. In other words, stock traders who had previously been betting the market would drop have been scared recently and are now more afraid the market will be up than it will be down. This is clear evidence that the Fed rate cut is having an effect on the stock market.

3) All the people who kept saying the news from Citi and UBS (who took big writedowns for losses on subprime mortgage and--in Citi's--case LBO debt) was bad news neglected a simple fact: by taking a very conservative view of the losses (i.e. they announced losses higher than expected) they created the impression that they were "throwing in the kitchen sink: and setting up for an improved 2008.

Indeed, Standard and Poors said as much in its evaluation of Citi this morning: "we expect fourth quarter earnings to be considerably stronger."

4) The most important players in the market are actively buying stocks. According to TrimTabs:
---new offerings are the lowest since Aug. 2002 (lower levels of new stock to compete against the existing market)
---insider selling is down 40% year over year (insiders don't think it's a good time to sell--prices may be higher)
---actual stock buybacks are $3 billion a day.

Playing catch up? Traders have complained that the rally has been led by big cap growth Stocks (true), at the expense of small, midcap, and value stocks (also true).

But not today: small caps outperformed large caps by a wide margin, and financials--which lagged all last quarter--outperformed all other big cap sectors.

Questions?  Comments?