2014 has hardly been a banner year for stocks so far but the S&P500 (^GSPC) overcame a terrible January to post new record highs last week. After closing at 1,741 on February 3rd the S&P roared back for the balance of the month and despite some Russia-related upsets it closed Tuesday at 1,873, its 2014 high.
“It’s been pretty stunning” says David Lutz of Stifel “Everybody was positioned for a coming into the year because last year was so strong.” As is so often the case in stocks, once everybody starts leaning the same way a vicious reversal is in the offering.
The concern for bulls now is that the long side will be just as crowded in March as the short side was at the end of January. Lutz isn’t worried. “The Street is still underinvested,” Lutz claims, citing research from Bank of America (BAC). “Not only are fund managers sitting on excess cash right now but only 11% of them are currently overweight the United States.”
As a final bullish point Lutz points to share buybacks putting an underlying bid under the tape. Whatever you think of repurchasing as a long-term corporate finance strategy the laws of supply and demand argue that companies can keep their stocks from free falling, if only long enough to let dip buyers get long.
Stocks may have only dropped 6% to start the year but it seems to have been enough to shake out the weak hands. It’s late to the party for those who bought the lows but if there’s one thing myth investors have come to rely on over the last 5 years it’s this: there are always buyers higher.
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