The Bear Market rally is running out of steam as we expected although a bit short of the mark we anticipated. The rally will likely stumble on for a few days this week (there have been some good earnings releases) but is unlikely to have enough momentum to carry the S&P500 index above the 200 day moving average. It has been an energetic rally but since there is no confirmation of the start of a new bull market in risk assets, now is time to dial back whatever risky bets one put on over the last two weeks.

S&P500 200 day moving average
Source: Bloomberg

Our view is not just based on divining patterns within the charts. The various portfolios we track are all showing very low ratings at the top of the rankings with some more aggressive portfolios suggesting a hefty weighting in cash. Given the precarious nature of the European Sovereign Debt crisis and the likelihood of a slide back into recession in the US, we are comfortable waiting for confirmation of market strength and missing some of the early upside if it turns out that we are being too conservative.

One short term factor which may put pressure on risky assets is the year end hedge fund redemption season (firms generally have 30-60 day notice periods).

Although on balance it is unlikely that the major institutions which make up the bulk of the hedge fund investment audience will abandon the “asset class” overall, there should be some significant withdrawals from some previous high flyers. As the notified hedge funds liquidate assets to meet the redemptions, do not expect other institutions to bid aggressively until the end of the year. When the money is reallocated to new funds, we could see a stronger than usual “January Effect”.

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