{"id":32562,"date":"2012-09-25T11:31:52","date_gmt":"2012-09-25T15:31:52","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/09\/3-reasons-to-expect-a-4th-quarter-rally\/"},"modified":"2012-09-25T11:31:52","modified_gmt":"2012-09-25T15:31:52","slug":"3-reasons-to-expect-a-4th-quarter-rally","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/09\/25\/3-reasons-to-expect-a-4th-quarter-rally\/","title":{"rendered":"3 Reasons to Expect a 4th Quarter Rally"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

Modern debates no longer happen on stages with lecterns, or even over office water coolers.\u00a0 They happen over Twitter.<\/p>\n

I lobbed a tweet grenade at friend and InvestorPlace Editor Jeff Reeves for writing \u201c11 Signs This Rally is Doomed<\/a>,\u201d<\/strong> calling him a buzz kill.\u00a0 In reply, Jeff invited me to make my own arguments for why this bull may yet have a little room to run.<\/p>\n

So, with no further ado, I\u2019ll offer my own \u201c3 Reasons To Expect a 4th<\/sup> Quarter Rally.\u201d<\/p>\n

Monetary Policy<\/strong><\/p>\n

As I wrote last week<\/a>, ECB President Mario Draghi and Fed Chairman Ben Bernanke are in a monetary arms race of sorts to see who can inject more liquidity into the financial system.\u00a0 And not too long after I wrote those words, Japan entered the fray with a massive injection of stimulus of its own.<\/p>\n

The world\u2019s third-largest central bank is expanding its quantitative easing problem by another 10 trillion yen to a full 80 trillion\u2014or about $1.02 trillion in US dollars.\u00a0 This adds to the Fed\u2019s \u201cQE Infinity\u201d and Draghi\u2019s \u201cBig Bazooka\u201d to what may collectively amount to the largest injection of monetary stimulus in history once the dollars, euros, and yen are counted.<\/p>\n

I don\u2019t usually pay attention to trader maxims and Wall Street clich\u00e9s, but I think the advice to avoid \u201cfighting the Fed\u201d is sound here.\u00a0 None of the stimulus measures are likely to create real growth in the economy, but they are very likely to inflate insipient bubbles in stock prices.<\/p>\n

Big Investors Piling In<\/strong><\/p>\n

As was the case last year, the so-called \u201csmart money\u201d hasn\u2019t looked particularly smart this year.\u00a0 The average equity-focused hedge fund is up only 4.7% through the end of last month (see article<\/a>), compared to 13.5% for the S&P 500.<\/p>\n

This means there are legions of managers out there who are desperate to get their performance numbers up before the end of the year and willing to roll the dice to make that happen.\u00a0 Hedge funds can generally make money on the upside or downside, of course.\u00a0 But given the momentum behind the market right now, I don\u2019t see many being brave enough to risk going short with so little time left in the year.<\/p>\n

This week the Financial Times reported<\/a><\/em> that the \u201cmasters of the universe\u201d were embracing long-only strategies \u201camid volatile markets, constraints on the capacity of their main trading strategies, and an evermore conservative investor base.\u201d<\/p>\n

Bottom line, after a decade of waning institutional interest in equities, managers may be rediscovering the stock market for lack of anywhere else to go.<\/p>\n

At the retail level, we also see investors warming to equities.\u00a0 Weekly inflows into equity mutual funds just hit a four-year high of $17 billion<\/a>.<\/p>\n

Normally, I might consider this a contrarian signal that we\u2019re nearing a top\u2014and Jeff touched on this in his bullet points on market sentiment.\u00a0 But much of this improvement in sentiment is due to the massive sigh of relief that the Eurozone didn\u2019t disintegrate over the summer.\u00a0 And I cannot stress enough how truly rotten investor sentiment had become after nearly five years of on again \/ off again crisis. \u00a0\u00a0There was a lot of catching up to do.<\/p>\n

Valuation<\/strong><\/p>\n

Most importantly to any value investor, stocks are not priced expensively enough to signify a major top.\u00a0 I am the first to admit that markets can take short-term plunges for any reason or for no reason at all.\u00a0 But real bear markets generally start with stocks priced aggressively, and I don\u2019t see this as being the case today.<\/p>\n

No, the S&P 500 is not \u201ccheap,\u201d per se, at 16 times earnings.\u00a0 This is roughly in line with the long-term average price \/ earnings ratio for the index of 15.<\/p>\n

But remember, we are not in \u201caverage\u201d times.\u00a0 Short-term interest rates are capped at virtually 0%, while the 10-year Treasury yields a pitiful 1.7%.\u00a0 In a low-interest rate environment, stocks should have a premium valuation, and we simply do not see this today.<\/p>\n

To be clear, no bull market goes straight up. There are always corrections or sideways consolidations along the way, and that is what we have seen for the past week.\u00a0 Stocks have drifted slightly lower as traders take profits and digest their gains.<\/p>\n

But until I see real signs of a breakdown,\u00a0 I see no compelling reason to pull the plug on an aggressive allocation.<\/p>\n

My advice?<\/p>\n

If you\u2019re feeling uneasy, tighten your stop losses or sell down some of your biggest winners of recent months.\u00a0 But don\u2019t go into bunker mode and miss what I expect to be an explosive end to 2012.<\/p>\n

SUBSCRIBE <\/a><\/strong>to Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

This article first appeared on InvestorPlace<\/a>.<\/em><\/p>\n

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