Bulls vs. Bears: Beginning of the quarter repositioning

The bulls on Wall Street were glad to see the second quarter come to an end yesterday. The bulls that have been talking up stocks in the face of tremendous economic headwinds are way too optimistic. The market will continue to trend lower as more and more companies either miss earnings expectations or give sub par guidance.

The VIX, a measure of volatility (aka fear), is no where near its March 17^th level when Bear Stearns was bailed out by the Federal Reserve. The sellers have not all been washed out of the market yet because we have not seen a heavy volume down day.

Also, all the market pundits that appear on CNBC say the market will turn later this year or sometime next year. For the market (and economy) to get back on track there needs to be a catalyst to cause this reversal to occur. Unfortunately, there are so many areas of our economy that are struggling I do not think one catalyst will suffice. The one area that could turn things around is a rebound (or at least no more declines) in housing, but this is a slow process that I do not see occurring anytime soon.

Today, why did we see stocks like U.S. Steel and Potash, two big winners from the first half of the year, significantly underperform the major averages on no big news reports?

The money managers want to show their investors they knew what they were doing by owning these stocks. When the quarter ends, they either take profits or dump the stock. Then with the extra cash, they buy up the losers from the previous quarter, e.g. financials. This explains why we saw Lehman Brothers up 6% today. Nothing about this company changed from yesterday when we saw it decline 11%. Look at CIT, another financial company. This stock was up about 30% today.

Do not expect the rally in these ‘loser’ stocks to last more than a few days. We saw this same pattern at the end of the first quarter/start of the second quarter when the financials rallied (this rally lasted about a month and a half until the bad news resurfaced. By the end of the second quarter, the financials were still toxic and should not have been touched.