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Room to Grow: Sentiment Augurs More Market Gains: Searching for Alpha for October 2010
Last month’s Searching for Alpha newsletter listed several reasons why I feel stocks are heading higher. Even after a spectacular September, the market looks poised for further gains.
Besides valuation and low interest rates, the biggest positive in favor of equities is the current state of investor sentiment. According to the Investment Company Institute (ICI), only 30% of mutual fund investors were willing to take “substantial or above-average risk” in May 2010. In 2008, the number stood at 37%.
According to the ICI, the decline in risk tolerance was “widespread across working age mutual fund investors.” Meanwhile, the more well-to-do older demographic continues to shy away from risk at a much great pace than younger market participants.
What this means, of course, is that the average do-it-yourself investor is missing the current rally. As stocks heat up, the retail crowd will succumb to the buying pressure, pushing stocks up even higher. The trick is to make the move ahead of this pile of cash.
It’s likely that much of the liquidity needed to buy will come from government bond funds. Investment advisors are cautioned to add to such positions carefully in the coming months.
Ben Warwick is Co-Chief Investment Officer of Aspen Partners, LTD. He can be reached at bwarwick@aspenpartners.com.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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