The market action over the last few weeks has been quite interesting. Overall, it's been a good start to the year. However, there have been many days where some negative economic or inflation news opened the markets down 300 points only to recover during the rest of the day and inevitably closing higher than the day before. From a trading or technical point of view, this is a good sign.

 

The question you might ask is why are we getting these large swings intraday and where is the volatility coming from? The reason for the volatility is that we are receiving offsetting information about what is happening in the market. Better fundamental news out of China and Europe as well as disinflation are being offset by lower economic and earnings growth from companies. The outcome? Volatility. Having said that, it appears that every time the market goes down there is a new group of buyers that are trying to buy it. Let's dig a little deeper into this.

 

If you were to listen to most of the hedge fund managers on CNBC, you will hear them talk about lack of earnings growth and the market being overvalued. They may be right. However, put yourself in their shoes for one moment. If they have been uninvested in the market since January 1^st, then their funds are underperforming the market by roughly 5%. Even worse, if they are short the market, they’d be underperforming by at least 10%. What else would you expect them to say other than the market is overvalued. They need the market to drop so that they can buy in at a level where they are not underperforming so much. The chart below shows just how short the average fund is on the market right now.

 

 

I could also point out that there are record amounts of cash on the sidelines as well. Anyway you cut it, there’s a lot of money that has missed out on the January rally and it needs to find an entry point into this market. Until the short positions get covered or that money on the sidelines gets invested into the market, you will continue to see investors "buying the dip".

 

I've also included a piece from our CIBC Economics team entitled "Time to Throw in the Towel".

 

@CacicWealth is now on Twitter. If you would like to follow please click here  .

 

As always, if you have any questions feel free to give us a call at any time.

 

Have a great weekend.

 

Milan