The Case for a Year-End Rally

Time flies, doesn't it?  Seems like just the other day I became a dad, and now my son is 3.  Wasn't it just New Year's for 2010?  From my perspective, time accelerates as it goes by.  Maybe that's because a year becomes a smaller and smaller percentage of our lives as we get older.

Well, time really flies for those managing money.  It's late-September, and not only is the end of the quarter almost here, the end of the year is approaching very fast.

All that ticking of the clock boils down to one thing, especially when the market begins to ramp - performance anxiety.

Getting left behind isn't just a painful experience for the last kid at recess when teams get chosen - it's fun for nobody.  For those who run money, failing to beat the market or their peers is death.

They say if an alligator is chasing you, you don't have to outrun the alligator - you just need to be faster than the next guy running from it.  It's the same way for portfolio or fund managers.  If they want to survive, they simply can't lag behind their peers.

A market which takes off without the average fund manager on board means he'd better make up any deficiency in his performance vs. the market, somehow, some way.  That might involve leverage in order to gain more exposure to additional strength, should it arrive.  Or it might mean accumulating high-beta names which are more likely to move faster than the market.  Whatever the case may be, the bottom line is the same:  he's got to chase strength.

We've seen this same mindset in recent weeks in the market.  The advance has been relentless, and even on the "down" days of the past few sessions, the dip-buyers have asserted themselves aggressively by picking up shares on even the slightest of discounts.

 

In the short term, stocks are still extended from the August lows.  We've seen a big ramp in a short period of time, and that makes this a tough spot to add new longs for anything but the shortest of timeframes.  But should we happen to see a secondary advance start to kick in after a healthy rest phase, it could prove to be a meaningful one.  Dips could remain shallow, as virtually any weakness is viewed as an opportunity. 

At this point, there's a lot to consider.  Since May, the market has largely been range-bound with some violent reversals during that period.  Shakeouts have been common, and secondary moves have been nonexistent.  However, with the indexes having each just established higher lows and higher highs on an intermediate-term basis, that dynamic quite frankly may be shifting.

 

Needless to say, it's not a time to ignore the possibility of another advance kicking in, particularly with what's at stake for those who manage money.  If this market starts to move again, it could really rip.

Let me close by clarifying that this is no prediction of what is going to happen.  To predict in the market is mistakenly seen as a requirement for success, and it simply isn't necessary.

This scenario is just one way things could play out from here, and as traders, we need to always be prepared to respond to anything that comes along.  Continuation would just happen to be a shift from the routine of the past few months, and therefore something that could catch many off guard.

So, stay on your toes!  If this market starts to show some follow through to the upside for the first time since July, get ready.  You won't want to be left behind either.