(This guest post comes courtesy of The Mad Hedge Fund Trader)
One of the many reasons that any stock market moves from here will be capped (SPX) is that the mutual funds that provided the steroids for last year’s parabolic move are running out of money. Equity mutual funds are now down to 3.5% in cash holdings, barely enough to cover the normal flow of subscriptions and redemptions. It also explains why each subsequent rally in stocks is happening on increasingly diminishing volume.
My friend Dennis Gartman of The Gartman Letter elucidated another reason. Now that we are at the one year anniversary of the bull market, those brave and clever enough to have bought early are seeing their paper profits qualify for long term capital gains. From here on, the number of such holdings increases, raising the level of potential selling.
Such fortunate holders may want to sell because 1) The gains could evaporate at any time, so it’s better to take the money and run. Remember, “buy and hold” is dead. 2) Obama & Co. may raise capital gains tax rates 3) the longer they wait, the more the tax advantaged positions increase, generating more potential sellers. The bulk of the stock market rally happened in the first three months, from March to May, 2009. Remember, “Sell in May and go away?” Still, zero interest rates incite a lot of perverse behaviour, as I saw around every corner in Japan in the late eighties, hence the slow grind up in the market we are witnessing.