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 For now, they have shifted money to other parts of the equities
market, instead of retreating to safe-havens like cash, and concerns
that there will be a full-scale retreat are muted. Despite the
ugliness in sectors like biotech, down 20 percent from its high, the
broad S&P 500 has lost just 3.2 percent.
And the flashing lights that often exist around the time of a deeper
reversal just aren't there.
"This sell-off is giving me the chance to buy at lower prices," said
Josh Spencer, portfolio manager of the T.Rowe Price Global
Technology Fund <PRGTX.O>. "If you pick your spots well, you can
play defense and offense at the same time, if you buy good companies
that have corrected in price."
His confidence may be justified.
Reuters examined 10 different market metrics, and found that eight
are supportive or at least benign when it comes to buying equities.
For starters, the initial public offering market looks remarkably
healthy, which rarely happens when stocks are going out of favor.
This week alone there are plans for 15 market debuts, according to
Briefing.com.
Last week wasn't too bad either — in a week in which some major
Internet stocks were taking a battering, online restaurant ordering
service GrubHub <GRUB.N> was a big hit and its shares are now up 36
percent from its $26 IPO price.
IPO proceeds so far this year come to $14.1 billion, not far from
the $15.4 billion in proceeds at this time for 2012 and 2013
combined, according to Thomson Reuters data.
Deal making is also buoyant. This year, U.S. mergers and
acquisitions have totaled $390 billion, the most since the same
period in 2007.
"You're not seeing deals pulled because of 'market conditions',"
said Art Hogan, chief market strategist at Wunderlich Securities in
New York.
HEDGE FUNDS FAR FROM FLEEING
Hedge funds are often a big part of market swings. So far,
long/short equity hedge funds are not moving to cash, instead
maintaining their gross exposure to equities.
"Gross exposure hasn't shifted very much," said Jon Kinderlerer,
head of risk advisory for prime services at Credit Suisse. "There
hasn't been signs of a big liquidation," though he did note a big
pullback from technology stocks based on cloud computing.
To be sure, there has been an increase in hedge funds taking on
protection against a big drop. Headed into April, between 16 and 17
percent of funds had some kind of "deep downside protection,"
according to Credit Suisse, about average for the last couple of
years.
As of Tuesday, that figure was around 18 to 19 percent of hedge
funds. That's a modest shift, but higher than most readings in those
years, suggesting increased concern among hedge fund managers.
Among individuals, the weekly survey of the American Association of
Individual Investors showed that last week, 35.4 percent of those
surveyed were positive, an increase from the previous week, but
still less than the historic average of 39 percent, according to
AAII. Individual investor sentiment is sometimes seen as a
contrarian indicator, with high levels of bullishness seen as a
signal that a correction could be imminent. But in this case the
survey appears to be largely in neutral.
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The CBOE Volatility index <.VIX>, an indication of how much
investors are willing to pay up for protection against a slide in
the S&P 500, remains subdued. At around 15, it is below the 20
historical median. It has closed above 20 just once this year and
only a handful times more in the past two years.
Market technicals are still supportive, if not for gains, at least
in limiting any losses. The 1,840 level on the S&P 500 looms large
(the S&P ended Tuesday at 1851.96), because it represents the 50-day
moving average, a measure of the intermediate-term trend in the
market. It also stands as what's known as a retracement level
between the early February low and last week's high.
When different technical indicators converge, it makes that level
more important, where clusters of buyers would be expected to show
up. Should the S&P fall through 1,840, it could presage a more
significant selloff.
SHORT BETS
Exchange data show short interest has increased since the start of
the year on an aggregate basis, but short bets in high-flying shares
have receded.
TripAdvisor <TRIP.O>, down 21 percent since early March, has seen
the number of its shares borrowed for short bets decline 18 percent
since the year started, according to SunGard's Astec Analytics data.
Borrowing in Alexion Pharmaceuticals <ALXN.O> stock, also down 21
percent from its peak, has fallen by almost half. Bets against
Facebook and Netflix have also declined in recent weeks.
"This would suggest short sellers are both getting out of those
stocks, closing their positions, and also refraining from opening up
new positions. They would seem not to expect profit opportunity on
the downside," said Karl Loomes, market analyst at Astec Analytics
in London.
Corporate results in the next few weeks will be crucial. Profit
projections have continued to drop for first quarter results, and
are now at a lowly 1.1 percent. That is largely as a result of the
long, hard winter's damage to consumer and corporate demand.
Earnings forecasts for the second quarter, though, have been
relatively stable. Expectations are for growth of 8.3 percent in the
second quarter, down from 9.7 percent forecast for the period at the
beginning of the year, according to Thomson Reuters. The market's
direction may be determined by whether the winter weakness gives way
to a spring takeoff in demand.
"If you start to see some shortfall on earnings and guidance to the
downside then this (selloff) could actually continue," said Gordon
Charlop, managing director at Rosenblatt Securities in New York.
Still, economists at Bank of America/Merrill Lynch forecast the U.S.
economy will grow at a healthy 3 and 3.5 percent in the next three
quarters. And recent data, including car sales and housing market
activity paint a better outlook for the U.S. economy.
(Reporting by Rodrigo Campos, David Gaffen, Ryan Vlastelica, Ross
Kerber, Timothy McLaughlin; editing by Martin Howell)
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