Not a Stockpicker’s Market

The S&P500 moved higher last week, closing up 3.6%.  Notably, volume declined for both the prior week (when prices ticked up slightly) and this last week. 

The declining volume is suggesting that buyers are not jumping in with both feet pushing the market higher; instead, the declining volume calls into question the strength and sustainability of the latest up moves.  For this rally to continue, buyer volume must grow.  It’s not happening.

As ususal, last week’s macro data was weak.  The Case-Shiller home price index disappointed with prices dropping almost 19% per year; because housing is ground zero for the global financial crisis and the recession, the continuation of plunging home prices does not bode well for consumer demand and credit market lending.  Durable goods orders, while ticking up, followed the recurring pattern of big downward revisions for the previous month; as if on cue, the markets focused on the current data and largely ignored the negative revisions.  Q1 GDP was revised to -5.7%, worse than the -5.5% expected.  And in the mortgage market, we learned that over 12% of all residential mortgages are either delinquent or in foreclosure–this record high number again points to the underlying mess (likely additional losses) residing within the massive $10 trillion mortgage market.  Initial claims were worse than expected (at 623,000) and continuing claims moved up to a record 6.79 million.

Technically, the daily charts are still look toppy with the downward price movement (from two weeks ago) still holding.  On a monthly basis, we’re stll firmly in a bear market.

This week in Barron’s, Michael Santoli highlighted some research that debunks the often-cited sales pitch from mutual fund managers that we’re now in a stockpicker’s market.  Why does this matter?  Well, if your mutual fund manager (the stockpicker) doesn’t make a difference in your fund’s performance, then why should you pay a fat (1.5% or more) fee?

Well it turns out that over the last three months (according to Barron’s), the “correlation among all stocks has been running above 0.8”.  And according to obvious empirical data, this correlation was just as high for all of 2008.  This suggests that almost all of a particular stock’s direction has been market driven–not driven by its unique traits and therefore capable of being “picked” by a manager.

Ouch!  Add to this, that about 99% of U.S. equity mutual funds lost a ton of money last year, it’s easy to wonder exactly why anyone would want to pay a mutual fund anything for managing your money.

When a monkey can do as good a job as your average mutual fund manager, the mutual fund industry is in danger of being exposed for what it really is–an asset gathering marketing machine designed to maximize profits for the managers, at the expense of the investors.

Banana anyone?

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