If you’ve bought stocks recently you’ve probably felt invincible.  And for good reason.  Stocks don’t go down anymore.  Since the market bottomed on February 8th stocks have climbed in 27 of the following 37 sessions for total gains of 12.5%.  That statistic doesn’t sound nearly as impressive until you look under the hood.  Declines in recent weeks have been more like pit stops before hitting the gas again.  The average daily decline during the 10 down sessions has been a remarkable 0.18%!  I wasn’t kidding when I said this market doesn’t actually go down.  The market has even become so unbeatable that CNBC has even aired a turtle slowly climbing towards 11,000.

Perhaps most incredible has been the total lack of news and volume that has accompanied the rally.  David Rosenberg says the market’s rapid ascent is a vicious case of prop desks churning their own accounts:

“So, that leaves me with a suspicion that the entities doing the buying are the pig farmers.  Who are they pray tell?  They are the prop desks at the five large banks.  They buy and sell securities, with leverage … to each other!  And, these transactions often occur late in the day or in the futures pit after the market closes.  There is no sign of any other buyer out there, including the Fed who has been too busy choking on mortgage backed securities and Maiden Lane assets.  To repeat, that is why the volumes have been so low.

This doesn’t come as a big surprise right before the quarter ends.  There are multiple benefits for these firms to finish the quarter on a positive note.   In addition, this is particularly interesting timing as the Fed’s MBS program ends tomorrow.  Bill Gross has previously admitted that portfolio manager’s have been reallocating capital from bonds and cash instruments to higher risk assets on the back of the Fed’s swap programs.  Whether this is a last gasp in those programs or simply end of quarter window dressing is yet to be seen, but David Rosenberg thinks the pig farmers can’t keep this game up forever:

“What we should be aware of about the pig farmers is that they could, at any time, flick the switch in the other direction.  What the “trapped longs” may be forced to do — the ones that have been sitting on their hands and have been waiting for the bear market rally to take their portfolio back to where it was at the peaks — at that point is start to sell.  That is when the volume picks up … and accelerates the downside pressure.”

This doesn’t necessarily mean the market is on the precipice of a collapse, but a return to normal is likely in order for April.  In other words, this market might actually be able to decline….

Source: Gluskin Sheff

Cullen Roche

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