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Why Stocks May Continue October’s Rise—Searching for Alpha for November 2011
Worries over a potentially messy Greek default, and the possibility of debt problems spreading across Europe, partially explains last quarter’s stock losses, the worst calendar quarter since 2008.
Similarly, Europe’s plan to boost its bailout fund by a trillion euros, announced last week, partially explains October’s huge equity rally—the best month for stocks in nearly a decade.
So what’s next? With the market in “teeter-totter” mode, pattern recognition traders may be guessing that the next move is down. However, there are a number of reasons to think that last month’s favorable tone will last until the end of the year. To wit:
- Hedge funds are in a hole, down around 8% YTD. They desperately need to make money this year, in many cases in order to survive. They have a big incentive to push the buy button and continue the current uptrend.
- Earnings reports have been favorable. Among the 300 or so companies that have reported, roughly seven out of ten have beaten expectations.
- This week’s G-20 summit should generate enough sound bites to keep optimism alive about Europe (at least until year-end).
- Expectations regarding the Debt Super Committee are extremely low. As a result, it is unlikely they will disappoint. Even a few good ideas from this group of six Democrats and six Republicans could have bullish ramifications.
Note that the above bullet points are short-term in nature, and not particularly impactful if taken individually. But they should provide the fuel for the year-end rally to continue.
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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