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The Pain Trade: Experts watch rally from the sidelines

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It may seem counterintuitive to classify the latest market rally as painful but for everyone sitting on the sidelines in cash it must have hurt to watch the tape tick higher. This “pain trade” goes back to legendary trader Jesse Livermore who posited that markets will move in whatever direction hurts the largest amount of people.

David Lutz of Stifel says we’re in the middle of the perfect example of Livermore’s theory. Since the 2014 low on the S&P 500 back at the beginning of February the index is up over eight and a half percent. Lutz cites a Reuter’s poll from around that low that said, “the 51 leading investment houses, the 51 smartest houses on the street...had cash at 20 month highs, they had bond holdings at four month highs [and] equity weighting at almost nine month lows.” So up the market went.

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So now that the market has reached new highs all that money on the sidelines has piled back in right? Wrong. “A lot of the big investors have been waiting for that employment report...on Friday,” Lutz says, “and that’s gonna be a big key factor because we’re trying to figure out exactly is Janet Yellen a hawk or a dove.”

Once that report comes out and we see what Yellen policy has done to a key economic indicator, Lutz believes we’ll see the market go higher still. “Even if the news is bad news,” he says, “the market likes to know what the news is, it doesn’t want to be surprised.”

Still not convinced? Lutz points out that “on the last 11 days that we’ve reported our employment numbers we’ve seen a rally in the market. Eleven times in a row. We’ll see if we go twelve for twelve this month.

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