'Buy the dips': The Wall Street cliche that has worked like a charm

One of the biggest fears as the stock market began to rebound late last winter was that sellers would swarm just as soon as the advance lost its momentum. Who would want to risk hanging around for another meltdown?

Instead, this now eight-month-old rally has been powered by classic bull-market thinking -- which is, you don’t sell the dips, you buy them.

As the accompanying chart of the Standard & Poor’s 500 index shows, the market has pulled back on numerous occasions since early March, but none of those declines has snowballed. The selling has quickly ebbed and buyers have regained the upper hand.

The most recent pullback occurred from Oct. 21 to Nov. 2, when the S&P fell 6.6% (as measured by its intraday highs and lows).

It was another gift to sidelined investors: Since the Nov. 2 low the S&P is up 7.9%. It closed at a 13-month high of 1,110.32 on Tuesday.

The simple definition of a bull market is when more investors want in than want out. We know the fundamental reason why that has been so in this year’s rebound: Investors sensed that the economy would begin to emerge from recession, which it has, even if the labor market has been left behind. A turn in the economy was expected to help corporate earnings  improve, which they have, though in large part because of brutal cost-cutting.

Meanwhile, short-term interest rates remain near zero and long-term rates have tumbled, further bolstering the case for equities. Rock-bottom short-term rates also power the "carry trade," encouraging speculators to borrow to buy stocks and other risky assets.

The market’s performance also has fueled plenty of conspiracy theories, usually centered on the idea that the Obama administration, the Federal Reserve and, of course, Goldman Sachs are making sure that stocks stay elevated. (If only it could be that easy.)

With 2009 winding down there’s another factor supporting the market, and it may trump everything else for the time being: Professional money managers can’t afford to take the chance of paring back sharply on stocks, for fear that this rally will keep going and leave them behind. And those who aren't in need to get in.

After the horrors of 2008, a money manager who doesn’t keep up with the market’s comeback this year is facing his or her greatest risk of all: the risk of unemployment.

Although many individual investors have stayed away from stocks as the market has climbed, they only have to answer to themselves, or maybe to their spouses. A fund manager who is lagging will have to face the wrath of aggravated clients for a second year in a row.

"This market is a nightmare for under-invested portfolio managers," says Jeff Saut, chief investment strategist at brokerage Raymond James & Associates. That, he says, explains why it doesn’t take much of decline in share prices to pull in buyers: Managers with cash really do see any dip as a gift.

A bigger sell-off is out there, somewhere. But Saut doesn’t see it coming soon.

His message to clients, he said, is: "You can get cautious, but don’t get bearish."

-- Tom Petruno

Bernanke on bubbles: Nothing 'obvious' at the moment

Federal Reserve Chairman Ben S. Bernanke reiterated Monday that the central bank now knows enough to be worried about asset bubbles.

He just doesn't see any in the U.S. at the moment despite some investors' concerns about stock market valuations and the still-ravenous global appetite for Treasury securities.

In a Q&A session after a speech in New York, Bernanke at first channeled his predecessor, Alan Greenspan, on the subject of bubbles: Bernanke said it was "inherently, extraordinarily difficult to know whether an asset’s price is in line with its fundamental value or not."

And he added: "It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system."

The Greenspan Doctrine was that it was too difficult for the Fed to know if a particular market was in a bubble (say, like housing in the mid-2000s) and that it was better for the central bank to leave markets to their own devices. We all know how that turned out.

Bernanke has made clear that the Greenspan Doctrine doesn’t rule the Bernanke Fed. Given the disaster wrought by the housing bubble, the Fed chief on Monday said that the central bank recognized the need to address the question of bubbles "in a serious way."

He said policymakers were "looking at various models of valuation for stocks, bonds and other kinds of assets" to judge their levels relative to the fundamentals.

As to whether the Fed would use higher interest rates specifically to prick a presumed bubble, Bernanke said that decision would have to be made in the context of the Fed’s two principal policy mandates -- promoting full employment and price stability.

If addressing "major misalignments of the financial markets" would further those policy goals, "We’d have to think about it very seriously," he said.

-- Tom Petruno

Photo: Fed Chairman Ben S. Bernanke speaking Monday at the Economic Club of New York. Credit: Mark Lennihan / Associated Press

Wall Street back in its groove as stocks and commodities surge, dollar sinks

The formula is working again: The seemingly incongruous combination of better-than-expected economic data and a falling dollar is driving the stock market to new one-year highs today.

The Standard & Poor’s 500 index has surged decisively through the 1,100 mark, which is where it had stalled in late October and again last week. If the S&P can hold its gains for the day the chart-watchers’ fear of a "double top" will be out the window.

The S&P was up 19.46 points, or 1.8%, to 1,112.94 at about 11:15 a.m. PST, amid a broad market rally. The Dow industrials were up 154.33 points, or 1.5%, to 10,424.

The government’s report on October retail sales was stronger than expected, and that helped fuel a rally at the opening bell.

But the best-performing market sectors are energy and raw materials -- a byproduct, once again, of a weakening dollar. The greenback is retesting last week’s lows against major currencies as global investors and speculators resume piling into higher-risk assets, using borrowed dollars for financing. That's the so-called carry trade.

The DXY index of the dollar’s value against six other major currencies was at 74.81 at about 11:15 a.m. PST, nearing last week’s 15-month low of 74.77.

As usual, gold is flying as the dollar sinks. The yellow metal is up $23.70 to a record $1,140 an ounce.

The buck briefly spiked higher today after Federal Reserve Chairman Ben S. Bernanke said in a speech in New York that the Fed was "attentive to implications of changes in the value of the dollar" -- an unusual comment, because the central bank typically pretends that it doesn’t worry about the U.S. currency, deferring that concern to the Treasury.

But currency traders saw no hint in Bernanke’s comment that the government will do anything more than talk about the dollar as it slides.

"In the absence of any notable shift on the policy front we doubt that ‘official’ jawboning can do much to reverse the current weak dollar trend," Vassili Serebriakov, a currency strategist at Wells Fargo & Co., said in an e-mail.

-- Tom Petruno

 Photo credit: Jin Lee / Associated Press

Bad combo: Speculators fear 'double-top' in key markets

Has the "carry trade" become too tired to carry on in the short term?

Thursday’s session in global markets saw a reversal of the recent rush into gold, emerging markets and stocks in general, and a rebound in the beaten-down dollar.

That spurred talk that the army of hedge funds and other speculators engaging in the carry trade -- the popular (maybe too popular) strategy of borrowing in dollars at rock-bottom interest rates to invest in risky assets worldwide -- might be getting anxious to lock in gains after markets’ powerful run since July.

"It’s prime time to take some profits," said Michael Woolfolk, currency strategist at Bank of New York Mellon.

The percentage changes in markets Thursday weren’t huge -- the Standard & Poor’s 500 index lost 1%, to 1,087.24, while the DXY index of the dollar’s value against six other major currencies rose 0.7% -- but some traders were pointing nervously to a potential "double-top" pattern on their charts. (Think: Bactrian camel.)

The S&P 500, for example, pulled back Thursday after briefly surpassing the 1,100 level. The index also had failed to hold above that level after topping it intraday on Oct. 21. That prior failure gave way to a sell-off that took the S&P down as low as 1,030 by Nov. 2, a drop of more than 6% from the Oct. 21 high.

The same potential double-top pattern may be playing out with the euro, which in recent days has made another attempt to push decisively through the $1.50 level, without success. The European currency ended Thursday at $1.485.

The euro also peaked out around $1.50 on Oct. 26, then fell to near $1.46 by Nov. 3, before making another run for $1.50 this week.

In the case of the euro and other favored targets of the carry-traders, "You couldn’t take out the [October] highs today, so some traders are throwing in the towel," fearing a serious loss of momentum, said Brian Dolan, currency strategist at Gain Capital Group in Bedminster, N.J.

Some traders also may be wary of betting further against the dollar in the near term with the U.S. again jawboning for a "strong" greenback and amid reports that Thailand, Russia and other countries have been buying dollars to try to slow their own currencies’ advances against the buck.

The point is, if the carry trade is about to see a respite, the dollar could get a bounce -- and all of the things bought with borrowed dollars could shift into reverse for a while.

-- Tom Petruno

Yes, Geithner's just kidding about a 'strong dollar'

Despite Treasury Secretary Timothy Geithner’s latest emphatic statement about the need to "maintain a strong dollar," financial markets know he’s not serious.

The Obama administration, like the Bush administration before it, pays lip service to the idea of keeping the greenback strong even as the currency continues to lose value against its major and minor foreign rivals.

This is theater, but it’s still important in the scheme of things, says Dan Katzive, currency strategist at Credit Suisse in New York.

Although global markets fully expect the dollar to stay weak because of rock-bottom U.S. short-term interest rates and soaring federal borrowing (among other reasons), Katzive notes that it’s in everyone’s interest for any further decline in the buck to remain orderly -- which pretty much describes the drop since 2001.

The last thing the world needs is a sudden dollar collapse that could trigger market pandemonium.

The DXY index of the dollar’s value against six major rivals, including the euro and the yen, is down 37% since mid-2001, including this year’s slide of 7.6%.

With traders already inclined to keep selling the U.S. currency, imagine the market's reaction if Geithner were to say, "You know, we’ve thought about it, and we’d really like to see the dollar fall a lot more."

Even if the administration believes that -- given that a weakening buck is a boon to U.S. exporters -- no one in a position of power is going to say so, for fear of waving a red flag at markets.

Instead, by reiterating the stock phrase about dollar strength, "They’re assuring the markets that the U.S. isn’t going to talk the dollar down," Katzive says.

Besides, the administration has to be figuring there’s no reason to mess with success.

Consider: One long-term concern about a falling dollar is that it could undercut U.S. financial markets by scaring away foreign investors, whose dollar-denominated assets lose value as the greenback falls.

But the Treasury bond market isn’t suffering from a lack of investor demand even as the administration borrows record sums. And the U.S. stock market, too, remains robust, as investors see dollar weakness as good news for American multinational firms. The Dow Jones industrials are at a new one-year high today.

"It’s the best of everything right now," says Win Thin, a currency strategist at Brown Bros. Harriman in New York.

-- Tom Petruno

Photo: Treasury Secretary Timothy Geithner. Credit: Chris Ratcliffe / Bloomberg News

Why the new love for the old Dow

For Wall Street’s bulls, bigger now is a better idea.

Shares of the largest, best-known U.S. companies are spearheading the market’s latest advance -- a switch from the first seven months of the rally, when small-company stocks mostly led the charge.

Some investors may just be figuring that, if they’re going to get aboard the bull market at this point, it’s safer to stick with the most familiar and most liquid issues.

The 30-stock Dow Jones industrial average closed at a new one-year high Monday, rising 203.52 points, or 2%, to 10,226.94. American Express Co., Caterpillar Inc. and United Technologies Corp. were among Dow members reaching their highest levels in at least a year.

By contrast, though most broader market indexes also advanced they remained below their recent highs. The Russell 2,000 small-stock index, for example, gained 11.96 points, or 2.1%, to 592.31. That left it 5% below its one-year closing high of 623.94 reached Oct. 14.

When the market surge began in early March, buyers did what they usually do at major turning points, which is to favor the most beaten-down stocks, betting that they’ll snap back the fastest. And as usual in bear markets, small-company stocks had suffered much greater losses than blue chips from September 2008 to March.

The snap-back bet on small stocks worked beautifully: The Russell 2,000 index soared 76% from March 9 to Sept. 30, far exceeding the 48% gain in the Dow index in that period.

But since Sept. 30 the Dow has pulled ahead, rising 5.3% while the Russell index has lost 2%.

Sam Stovall, chief investment strategist at Standard & Poor’s in New York, says it’s typical for big-name stocks to take the lead in the second year of bull markets. Given the magnitude of the market’s gains since March, some investors may already be moving out of smaller issues and into blue chips with four months yet to go before the bull reaches its one-year anniversary, he said.

The mega-companies’ stocks have three other things working in their favor. One is the continuing slide in the dollar, which can be a boon to U.S. exporters by making their products cheaper for foreign buyers, of course.

Second, given nagging doubts about the U.S. economy’s growth prospects, many investors are looking to multinational firms for their overseas growth potential. McDonald’s Corp. shares rose 1.5% to $62.64 Monday, the highest since January, after the company said that same-store sales were up 3.3% in October from a year earlier -- with all of that improvement coming from foreign stores.

Third, investors who are jumping into stocks now may want to be sure they also can jump out quickly, should some out-of-the-blue bolt of bad news trigger a serious plunge. That’s an argument for owning the most liquid, easy-to-sell shares, and those are the names in the Dow.

-- Tom Petruno

Photo: The Wall Street bull statue in lower Manhattan. Credit: Robert Caplin / Bloomberg News

Dow at new one-year high as stocks jump worldwide

The bears are being routed worldwide today as investors find plenty of reasons to buy stocks and not many reasons to sell.

The Dow Jones industrial average was trading at a new one-year high at about 11 a.m. PST, up 176.84 points, or 1.8%, to 10,200.26. That tops the recent closing high of 10,092.19 on Oct. 19.

Other major U.S. indexes also are up sharply, though still below their recent peaks. The Nasdaq composite, up 34.30 points, or 1.6%, to 2,146.74, is within 1.4% of its closing high of 2,176.32 on Oct. 19.

Today’s rally is rooted in faith that the global economy won’t go back into the soup. That sentiment got a boost after finance ministers and central bank chiefs of the G-20 nations met over the weekend in Scotland and pledged not to rush to remove fiscal and monetary support programs.

"We agreed to maintain support for the recovery until it is assured," the group said in a statement.

That helped stoke investors’ appetite for risk-taking as markets opened today. Emerging-market stocks are among the day’s biggest gainers. The Indian market jumped 2.1%, Russian stocks surged 5% and the Brazilian market is up 2.4% so far.

Commodity prices also are broadly higher, led by oil, corn, cotton and gold, with the yellow metal at a new all-time high of $1,102.20 an ounce, up from $1,095.10 on Friday.

With risk takers on a roll, the dollar is the day’s loser -- but it’s clearly not hurting the mood on Wall Street. The DXY index of the dollar’s value against six other major currencies is down about 1%.

As for concerns that the U.S. House’s passage of the $1.1-trillion healthcare reform bill would hammer medical-related stocks -- well, not today. Most major drug stocks are trading higher (Merck is up 65 cents to $33.24) and an index of 11 big HMO stocks, including Wellpoint Inc. and UnitedHealth Group Inc., is up 1.5% to a new 52-week high.

Even the bond market is cooperating with stock bulls today: Despite the dollar’s slide Treasury bond yields are flat compared with Friday.

-- Tom Petruno

Photo: Richard Drew / Associated Press

Post-Fed scorecard: Gold at new high, other markets slide

Gold’s latest rally powered ahead Wednesday as the Federal Reserve maintained a dovish attitude toward interest rates.

Meanwhile, the dollar, the stock market and longer-term Treasury bonds all sold off after the Fed issued its post-meeting statement, which repeated that policymakers expected to keep short-term rates low "for an extended period."

Near-term gold futures gained $2.40 to $1,086.70 an ounce, a new record closing high that lifted the year-to-date price gain to about 23%. The metal traded as high as $1,098.50 for the day, after surging nearly $31 on Tuesday on word of the Indian central bank's big purchase.

Not surprisingly, the likelihood of the U.S. maintaining near-zero short-term interest rates was a negative for the dollar, which helped bolster the case for gold. The euro jumped to $1.487 from $1.472 on Tuesday.

The stock market, which rallied early in the day on some relatively upbeat economic data, surrendered most of its gains in the final 30 minutes of the session -- a decline some analysts blamed on the U.S. House’s vote to speed up new limits on credit card interest rates. That slammed bank stocks. The Dow industrials closed up 30.23 points, or 0.3%, to 9,802.14, after being up as much as 156 points.

Some investors also dumped longer-term Treasury bonds post-Fed. The 30-year T-bond yield jumped to 4.40%, up from 4.33% on Tuesday and the highest since Aug. 14.

On the face of it, the markets might seem to be worried about the Fed falling behind the curve in keeping inflation subdued -- except, where do you find inflation these days, other than in asset prices? (OK, oil is a problem again lately, that is true.)

Nicholas Colas, investment strategist at BNY ConvergEx Group in New York, thinks the stock market’s disappointing action is just another sign that "it’s definitely in need of a breather here." Stocks have been struggling since peaking in mid-October as more investors have turned cautious about the near-term economic outlook.

The Standard & Poor’s 500 index, which edged up 0.1% on Wednesday to 1,046.50, is down 4.7% from its one-year closing high of 1,097.91 on Oct. 19.

"The biggest single question is, how are consumers thinking about their prospects going into Christmas?" Colas said. People may think better about their prospects if they have more faith that job cuts are ebbing -- which is why the government’s report Friday on October employment trends will be key, as usual.

As for the sell-off in the bond market, traders noted that the Treasury on Wednesday gave more details about its plan to lengthen the average maturity of the government’s debt load, which of course means issuing more longer-term debt and fewer shorter-term securities. That may have triggered some knee-jerk selling of longer-term bonds.

As I noted in this post, the trend no one would want to see take hold this month (or any month) would be rising bond yields accompanied by falling stock prices. Just something to watch.

-- Tom Petruno

Photo credit: Genaro Molina / Los Angeles Times

Why the 'disconnect' between the economy and your 401(k) could persist

The stock market has a serious lot working against it at the moment: fresh doubts about the economic recovery, a rebounding dollar and the general sense that share prices are overdue for a pullback after a nearly eight-month-long advance.

Including Friday's slump, the Standard & Poor's 500 index is off 5.6% from its one-year high reached Oct. 19, and talk of a bigger drop is rampant (again).

But if institutional investors remain reluctant to sell equities, it's because they see that plenty of companies are looking better than the U.S. economy as a whole.

How is that possible? In my weekend column in the Times, I note how corporate balance sheets have improved this year thanks in part to the plunge in long-term borrowing costs -- which has been abetted by small investors' ravenous demand for bonds.

Wall Street also can't ignore the turnaround in corporate earnings, even though the bottom line has been fattened largely because of vicious cost-cutting at workers' expense.

Why is the U.S. still losing jobs? As economist Allen Sinai put it: Companies are "making good money without people."

That isn't a path to long-term prosperity, but remember: Many major American businesses (the kind you probably own in your 401[k]) are betting on faster growth abroad than at home, anyway. And their biggest investors, for the most part, don't care where in the world they make money, as long as they make it.

I also note in the column that, as long as doubts persist that the U.S. economic recovery can sustain itself, the Federal Reserve (which meets this week) will remain in a supporting role with near-zero short-term interest rates.

And with "cash" investments paying nothing, and long-term bond yields low, it's that much harder for investors to bail on stocks en masse.

So, could the market pull back further this month? No question. That would surprise virtually no one.

But could we face another crash that obliterates your 401(k)? Highly unlikely in the near term.

Read the full column here.

-- Tom Petruno

The dollar rises, and (almost) nobody is happy

Blame the almighty dollar -- or, uh, the slightly less anemic dollar.

Friday’s big sell-off on Wall Street and in the commodity pits was accompanied by another rise in the greenback’s value against other major and minor currencies.

The DXY index, which measures the dollar against six other key currencies, rallied 0.5% to 76.3, the sixth increase in seven trading sessions.

The euro fell to $1.472, down from $1.501 a week ago. The dollar was worth 1.76 Brazilian reals, up from 1.72 a week ago.

The dollar had mostly been declining since late April, a reflection of global investors’ willingness to abandon the relative haven of the U.S. currency for riskier assets -- including emerging-market stocks and raw materials.

And with U.S. short-term interest rates near zero, investors also have taken to borrowing in dollars to fund purchases of investments worldwide. That’s the so-called carry trade.

But in the last two weeks, as worries have mounted about the strength of the U.S. economic recovery, the dollar has staged a modest comeback.

On the face of it, that’s counterintuitive: If the U.S. economy struggles, shouldn’t that mean a weaker dollar?

It should, over time. But in the short-term, concerns about the U.S. stoke fears about the global economy as well. And that is helping to drive some investors and traders out of the riskier assets that have been so popular since March, and into "safer" things -- including U.S. Treasury securities.

"It’s the unwinding of the carry trade," said Marc Pado, U.S. market strategist for brokerage Cantor Fitzgerald.

As long as that’s going on, it’s bullish for the dollar.

It’s no coincidence that the recent low for the DXY index -- 74.97 on Oct. 21 -- also marked the recent high for the Reuters/Jefferies CRB commodities index. The CRB index is down 4.8% since then, including Friday's 2.1% drop.

Crude oil futures fell $2.87 to $77 a barrel on Friday, the lowest price since Oct. 14.

The iShares Emerging Markets Index exchange-traded stock fund has tumbled 9.6% from its recent high reached Oct. 14, as stock markets in Brazil, South Korea, India and other emerging economies have tripped.

Why, though, should U.S. stocks fall just because the dollar rebounds? The fundamental reason is that a stronger dollar hurts U.S. exporters by potentially raising prices of their goods abroad.

But the knee-jerk reaction of traders may be a bigger factor kicking the U.S. market lower: If hedge funds and other traders are buying the dollar they’re automatically going to be selling U.S. stocks, just as they were simultaneously selling the dollar and buying stocks for much of the last seven months.

As long as the formula works, there are plenty of players for this game.

-- Tom Petruno