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Tuesday, September 11, 2012

As I Was Saying...

Last week I noted the strong market rally on September 6 was likely due more to many portfolio managers returning from the beach vacation with performance anxiety more than any particular news item.

It seems I am not alone in my view. Raymond James analyst Jeffrey Saut wrote this in his September 10 commentary (after citing the same WSJ article I had noted):

In last week’s verbal strategy comments I suggested participants study the chart pattern of the S&P 500 (SPX/1437.92) and then think about what it would feel like if you were an underinvested portfolio manager (PM), or even worse a hedge fund that is massively short of stocks betting on a big decline. The concurrent performance anxiety would be legend because not only would you have performance risk, but also bonus risk and ultimately job risk. Accordingly, I have been opining that stocks were likely going break above the April highs (1420 – 1422) and then trade higher toward the 1450 – 1477 zone driven by what Dan Greenhaus said, “that pressure to try and play catch-up and not just merely play along but to gain some outperformance." Of course that performance pressure is magnified with end of the third quarter “report cards” due for PMs, followed by fiscal year-end, as many PMs close their books at the end of October.

I'm reminded of the story in Scott Patterson's book The Quants . He writes about how in the middle of the financial crisis major hedge funds unwound their positions in quantitative strategies leading to large moves in stocks in the absence of any fundamental news. One of the quants looked up at the reporters on the CNBC screen scrambling to give reasons for the moves based on fundamental factors. The hedge fund manager just looked up shook his head at the cluelessness of the reporters...they had no idea what was going on ...they were looking in the wrong place.

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