My latest Street.com column, "Can Sidelined Cash Cause a Blow-Off Top?" is up at RM. I don’t find the subject matter controversial, but some may.
Here’s an excerpt:
Anecdotal evidence explains why I am so confident about the amounts of undeployed capital in the hedge-fund community . . . lately I have been observing that many of these funds have been looking to deploy cash outside of their own models or strategies. Quite a few of them have been inquiring about throwing off capital to outside managers or strategists, and anecdotal evidence suggests the rise of these "alternative investments" has led to overcapitalized hedge funds . . .
If all this hedge-fund cash starts finding a home at once, we could see a similar topping phenomenon. My best guess — and it’s only a guess — would be that the climax will arrive sometime late in the second quarter of 2005.
I can imagine what that might look like: The market consolidates for a while, and then rallies into the holidays and early 2005. Then comes a mild January consolidation, thanks to the mild winter keeping a lid on oil prices. That allows the next leg of the rally to begin late January, early February. By the time winter gets really nasty, the bull has picked up enough momentum to ignore rising crude prices. The momentum sucks in new cash, which drives markets higher, which attracts even more capital. We make a new high by April or May, despite rising oil prices and a troublesome lack of job creation. Some profit-taking cools the market off a bit. In the May/June period, the market takes another run at the highs but fails to make a new peak, and on diminishing volume. And that’s the beginning of the end.
All that cash on the sidelines is bullish — but only up until a point.