So, which direction is the market headed now, over the next six months?

Of course the stock market bounces around on a daily or weekly basis, but what direction is it headed over, say, the next six months? I can honestly say that I really don't know. I am fairly confident that the stock market will continue to grind its way higher over a two-year and longer timeframe, but there are so many hedge funds and in-house proprietary ("principal") trading desks at the big banks "playing" (and manipulating) the markets on a short-term basis, that there simply isn't enough public information on their thoughts and intentions to discern the likely direction of the market. These people have collectively taken a "risk on" position for the past several months, but they could decide to either maintain that posture or flip over and reverse it to a "risk off" position without a moment's notice and on whatever internal criteria they may be using but are not going public with.

 

In the old days, the brokerage firms told clients which direction they "thought" the market was headed and clients followed, but these days with all the hedge fund and prop/principal trading the firms have a vested interest in profiting from whatever causes losses for the customer. Oh, sure, let the customers "win" occasionally or frequently enough to keep them in the game, but bleed them slowly the rest of the time. Kind of like the lottery, with just enough people  winning big to keep up the interest even though most people only lose money – and count on the fact that the "losers" will be too embarrassed to publically admit their losses.

 

In the old days, prop/principal trading could "manipulate" the market direction for only days, weeks, and only occasionally a couple of months at a time, but now with all the hedge funds and their "hot money" (profiting from short-term trading rather than long-term investment), the direction of the market can be artificially "influenced" for six to nine months and sometimes even a year to eighteen months before underlying economic and business fundamentals build up or decline enough to overwhelm the artificial influences.

 

In short, the nice rally since the beginning of the year is much more likely to be "fake" than real and sustainable. Lucky for me, I am not "playing" the market for short-term profit, so I am less vulnerable to whether the "swing" continues or reverses.

 

Personally, I think we need to split the stock market, a la Glass-Steagall, into a "casino" (derivatives) market for the short-term traders and an "investment market" for the long-term, true investors. Let people "bet" on stocks, but not "with" stocks. Stocks should be reserved for income and long-term appreciation.

 

But, that kind of reform is not likely to happen any time soon.

 

Meanwhile, we have to read any advance or decline of the stock market with a rather large grain of salt. A major rise or decline over a year or even eighteen months is just as likely or even more likely to be the result of the "artificial influence" of hedge fund and big bank prop/principal trading as the result of actual movement in economic and business fundamentals. And if even a one-year market "trend" is suspect, you know that a three-month "trend" is a completely unreliable indicator of where the market or the economy is headed next.

 

In short, the current "rally" of 2012 could simply be taking a breather here before continuing higher, or it could be running out of steam and faltering and on its last legs and about to flip over and run right back down for the entire distance it ran up. Flip a coin as to which will happen next.

 

For me personally, I am still sitting on the cash for my 2011 retirement contributions. I simply do not see any compelling investments and am a little worried about the "intentions" of the hedge funds and prop/principal traders. For now, my intention is to invest 25% of the cash after six months or when the market declines 10%, whichever comes first, and to invest the remaining three "tranches" with the same formula. Having a little cash (10% to 20% of total assets) is actually a good idea and the profit to be made by buying on any sharp market pullbacks would easily compensate for the tiny money market fund interest and inflation loss. Exactly what I invest in is open, with a default of investing more in my 2025 target date fund, or maybe some Verizon (VZ) or Priceline (PCLN). Verizon pays a healthy dividend and Priceline is the only company whose product/service I am really passionate about.

-- Jack Krupansky