With a week left in the third quarter the bulls are winning 2012 in a blow-out. The S&P500, NASDAQ and Dow Jones Industrial Average are up more than 15%, 20% and 10% respectively. The advance is twice the gains foreseen even by the notoriously perma-bull strategist camp which was collectively looking for about a 7% gain when polled last December.
Having missed the rally, many fund managers are looking to sit out the balance of the year, at least according to this morning's Wall Street Journal. Both the paper and the managers are wrong again. According to the most recent data available from Hennessee Group, the average hedge fund was up a mere 3.8% through August. If those fund managers head to the sidelines now, they aren't getting back in the game.
Companies have warned and it hasn't mattered. FedEx (FDX), the bellwether of the global economy both missed and guided lower in September and the market didn't care. Europe's still in trouble, the U.S. employment situation is getting worse, the fiscal cliff looms, and the Fed is throwing money around like a rapper at a strip club.
The tape has been climbing this wall of worry all year. In the attached clip my Breakout co-Host Matt Nesto says it's time for investors to come back to earth. Ticking through much of the above Nesto says he thinks the "market is weird right now and it's very difficult to invest in."
He's right about the challenge but wrong about the conclusion. For the better part of a decade rallies have been nasty, brutish and short. Leaving aside the fundamental argument that maybe, just maybe, the worst-case scenario doesn't come to pass, fundamental momentum alone, or as my partner calls it "letting your winners run", dictates buying dips.
Sectors that aren't supposed to go higher are having a huge year. The SPDR S&P Homebuilders Index (XBH) is up a stunning 50%. The Consumer Discretionary Select ETF (XLY), containing the most heavily shorted names on earth, is up more than 20%. They aren't higher because of tremendous results but because they beat rock-bottom expectations.
When less lousy than expected results are good enough to spark a rally it's time to look for chances to get into the markets, not jump out of them. The markets are overdue for a slide. Nesto says to sell now and avoid the slump. I'd use it to get long, focusing on the "b-list" winners of this year like Google (GOOG) for example, and steering clear of value traps like Intel (INTC).
The world is lousy but not getting much worse. Fund managers are way behind and individuals have money on the sidelines and a growing sense they're missing out in equities. It's not a great bullish thesis but it's the best one we have for now. Investors should be so lucky as to get a dip.