November is just half way over and already the markets are worrying about December.
The theory, among stock traders and others, is that some investors have had such a good year that they are ready to shut the books and sit it out until 2010, creating a liquidity vacuum.
"There's somewhat of a debate...There is a concern about liquidity drying up in a meaningful way in December, but that is yet to be seen," said Morgan Stanley chief U.S. credit strategist Greg Peters. "There's a concern from bankers and syndicate folks that if you want to bring a deal you have to bring it soon."
For that reason, there's been a flood of corporate debt issuance this week, totalling $17 billion in investment grade in just two days. More deals are expected through the end of the week. Also on tap for markets Wednesday are the consumer price index, as well as housing starts and building permits, all at 8:30 a.m.
Tuesday's markets were fairly quiet. The so-called "risk trade" was out of whack, as the dollar rose, commodities rose, bonds rose and stocks rose slightly. Typically, the dollar trades countertrend to the risk assets, like stocks and commodities.
The low volume nature of the nearly 8-month old market rally has been an ongoing concern, but now the absence of institutional players could be an issue.
Jack Ablin, CIO of Harris Private Bank, said he watches the action in the last half hour of trading for clues about the market, and he is getting concerned. "It used to be we lose ground in the morning and rally back in the afternoon. Now it seems we're losing steam in the last half hour. That's the time usually reserved for institutions," he said.
"It looks like a lot of the thrust form the biggest players is beginning to wane. The good news is because values are full, we're not stretched, it's not a bubble. I think there's enough support around the edges. That's why if we had anything, it would be a 10 percent correction at most, and an opporutnity for those on the sidelines to get back in," he said.
Morgan Stanley's Peters said there's a feeling that some funds could just sit out for a while. "My sense is liquidity will be choked down, but what I think you'll actually see is an up move. I think it could lend itself to a down trade or an up trade, but I think the tendency this time around will be an up trade, which is why you're seeing on the equities side, people start to traffic in the large caps and also a lot of options trades as well. It tells you liquidity is a concern, and they're also worried about a powerful move to the upside," he said.
Ablin said if there is a correction, it would most likely be early in the year. One of his favorite indicators is flashing a warning -- the Smart Money index, which subtracts the S&P 's move in the first half hour of trading from its movement in the last half hour of trading. The first half hour is mostly influenced by order flow from retail investors, while the last half hour is when institutions are active.
He said the index bottomed in October, 2008, and it is now beginning to weaken.
"I don't think we're in a bubble, but I would start to get a little more squeamish if this market goes up a lot.. We may have to wait until after year end. (for a correction) We actually could sees a little pop of upsurge at year end as some of these mutual fund mangers throw in the towel and square in positions for year end," he said. "Maybe they do a flurry of buying and window dress the end of the year. That could provide a tail wind..that's my sense. (Patti Domm, Market Insider)