Published April 11, 2011

Stocks recently enjoyed their best first quarter since 1998, and begin April on an upbeat note. For the first quarter of 2011, the Dow closed up 6.9 percent, the S&P 500 was up 5.95 percent, and the NASDAQ was up 5.15 percent. Those are strong showings in the face of continued uprisings in the Middle East, rising prices for oil and commodities, and the Japanese earthquake and tsunami. The market, dubbed by some as “the Teflon market,” just kept rising in the face of bad news. Volume was steady, if not spectacular – a sign that the market had not entered a frothy stage. Indeed, retail investors have not yet become excited about the market, which reached its highest levels in three
years.

Traders are unwilling to bet against the market. Short sellers had the lowest level of loans against stocks sold short in five years. The ratio of long bets on the market to short bets is near a six-year high. Hedge funds are less willing to take the short side against a rising tide. Bond funds continued to experience outflows, while some bond funds slipped into negative territory for the year to date. Readers and clients know that I have been encouraging the reduction of exposure to bonds for some time. I see no reason to change that position, particularly as Fed futures are betting on a rate rise by the end of the year.

Surely the massive intervention in the markets by the Federal Reserve not only stemmed the downward trend, but aided in the recovery. Quantitative easing – an effort by the Fed to buy bonds, and keep interest […]