Why the market doesn’t fall: The big money needs a winner in ’09

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After a seven-month rally the stock market ought to have plenty of excuses to pull back, or to at least stop rising for a while. Yet the Dow Jones industrials were back above 10,000 on Wednesday for the first time in a year.

Frustrated bears -- who believe that rebounding stock prices are way ahead of economic reality -- may be overlooking one basic reason why the market is holding up so well: Big money managers badly want this year to finish out a winner after the devastation of 2008. And a winner is what they’ve got working, if something doesn’t come along to screw it up.

So with the economic and corporate-earnings data in recent months generally pointing to things getting slowly better instead of worse, many money managers have simply been reluctant to sell -- which is why the few market setbacks since June have failed to snowball beyond mid-single-digit percentage losses in major indexes.

The fear is that if you sell you’ll be left behind. That’s exactly what has happened to many or most investors who have let go of stocks in the last seven months, with share prices up 50% or more.

Now, as trader Dave Rovelli at brokerage Canaccord Adams put it, ‘Whenever we get any significant selling, the bids pile in.’ That further reinforces the idea that it’s too early to exit the market.

‘People are interpreting everything positively,’ said Doug Kass, head of hedge fund Seabreeze Partners. He thinks the optimists are wrong, and that stocks are headed lower.

But positive interpretation of the economic and profit backdrop is what happens in (and drives) a bull market. Investors look for an excuse to hold on, if not to buy. And the market’s failure to accommodate calls for a sharp ‘correction’ in prices brings more antsy money in from the sidelines. It helps the bulls’ cause that cash now earns nothing.

I’ve lost track of the number of money managers who’ve told me that they believe the market can easily rally into the end of the year. Some element of that is wishful thinking, but it can become self-fulfilling.

Most big investors, however, also see a reckoning in 2010. Many expect the economy to struggle to stay in recovery mode next year. There also is universal concern about the federal budget deficit, a potential new wave of home foreclosures, and the risk of inflation if the Federal Reserve doesn’t begin to tighten monetary policy.

But if optimism extends only to the end of 2009, the logical question is: When do portfolio managers start taking some money off the table, anticipating a rougher ride for the market in 2010?

They can’t all just wait until New Year’s Eve. Yet for now, many fund managers’ retort to advice to lighten up on stocks is this: ‘You go first.’

-- Tom Petruno