Stocktake: Bulls continue to buy the dips

Stocks soared after Federal Reserve said it would be ‘patient’ with hike rates

As 2014 ends, the buy-the-dip trade continues to work its magic.

Stocks soared last week after the Federal Reserve said it would be "patient" in deciding when to hike rates. However, despite investors' enthused reaction, there was no real surprise in the Fed's carefully worded statement. Nor was Fed chief Janet Yellen especially dovish in her outlook.

She stressed that she saw the oil collapse as transitory, rather than a serious disinflationary threat, and was not concerned about possible Russian contagion. The first rate hike remains likely to come in June, rather than the path to rate normalisation being further delayed.

What really set the stage for the buying surge was the fact that stocks had been pummelled in previous days. Pullbacks have been short and shallow throughout 2013 and 2014, and investors have become conditioned to seeing every dip as an obvious buying opportunity.

However, while buying into weakness continues to work, there has been a notable increase in volatility in recent months. Volatility has been extraordinarily subdued in recent years, but is likely to return to more traditional levels as US monetary policy is normalised.

Ultimately, recent market action may be more revealing than the Fed’s actions, the message being that the bulls remain in charge, but volatility is awakening.

Putin effect dogs equities Apple, Exxon Mobil and Microsoft have one thing in common – each is worth more than the entire Russian stock market.

Plunging oil prices and European sanctions haven't helped Russian stocks, but equities appeared incredibly cheap long before the recent chaos. Russia's Micex has traded on five or six times earnings for most of the last three years – less than half that seen in the average emerging market, most of which already trade at a discount to developed markets. Contrarians with a strong stomach may be tempted to buy, although the same could have been said before the recent carnage. The problem, as GMO's James Montier noted recently, is that although stocks look insanely cheap, investors are rightly fearful of expropriation. Vladimir Putin's nonchalant attitude towards corporate governance, the Economist calculated in July, had indirectly cost Russian investors some $1 trillion. That bill continues to mount.

Getting shirty over finance Spanish finance professor Pablo Fernandez recently penned an usually blunt condemnation of the "absurd" capital asset pricing model, a model that describes the relationship between risk and expected return.

If that sounds dry, his follow-up paper, which details responses from finance experts, is anything but.

Many liked it; others saw it as “silly” and “primitive”, while one respondent was “shocked at how horrible your paper is.

“It is without a doubt the worst excuse for an academic study I have ever seen . . . you are truly in the wrong profession.” For other similarly candid assessments, see http://goo.gl/X4jCTu.

Crystal ball gazers see gains The US bull market is nearly six years old, making it the fourth-longest in history. Might the bear reappear in 2015?

Not according to Wall Street. Business magazine Barron’s recently asked 10 prominent strategists how they saw 2015 unfolding; none forecast a decline, with the consensus being that another 10 per cent rise is in order.

Strategists tend to be perennial bulls, of course. The main tenets of stockbroker economics, to borrow from UK investment consultant Andrew Smithers, are that all that all news is good news, and the market is always cheap.

Not that the bears' forecasts are likely to be any more enlightening. Some years back, money manager Barry Ritholtz said all pundit forecasts should be accompanied by a disclosure that the forecaster "states that he has no idea what's going to happen in the future, and hereby declares that this prediction is merely a wildly unsupported speculation".

Unsurprisingly, that suggestion hasn't come to pass, but some, like author and indexing guru Burton Malkiel, don't play the game.

“There isn’t anybody who can tell you what’s the best asset class for 2015”, he told Bloomberg recently. “Nobody”.

Time for the Santa Claus rally? Will Santa descend on Wall Street in the coming days? The so-called Santa Claus rally refers to the last five trading days of the year and the first two trading days of the new year, according to the Stock Trader's Almanac, with stocks historically gaining an average of 1.5 per cent during this period.

This seasonal cheer is not confined to the United States, according to a forthcoming Journal of Financial Planning paper, which has reportedly found evidence that the holiday effect can even be found in non-Christian countries like Indonesia.

The authors suggest investors are more optimistic at this time of year, and that companies and governments are less likely to report bad news around Christmas.

Whatever the reason, the evidence suggests the Santa Claus rally is real – just like the man himself.