Gettng Whipsawed Around This Year? You're Not Alone

It's not a secret that market participants have been getting whipsawed around all year long. In 2008, the market pretty much went straight down the whole year. In 2009, after a brief (yet scary) sell-off in January and February, the market pretty much went up the rest of the year. 2010 was more of the same: up all year (except for the brief correction in the summer). This year could not be more different. The lack of trend has made this market very difficult to navigate. In fact, less than a quarter of Stock Fund Managers are outperforming the S&P500 through Nov 30.

Michael Santoli has a great piece about that this morning in Barrons. I Love the baseball references:

In pro baseball, most hitters will tell you they usually don't want to know whether a teammate thinks he's stolen the catcher's sign for the next pitch. Not only is there a risk that the filched signal is wrong, but the input adds complexity to an already daunting task. Hitters may make an educated guess on what pitch might come, but their main job is to attempt a disciplined reaction, spoiling or avoiding great pitches, and pouncing on mistakes.

Professional investors typically adopt the same stance. They don't try to predict tomorrow's headlines or the short-term market reaction, but instead try to sell their clients and boards of directors on the idea that, over a long season, their discipline will nudge their averages at least a bit above the league benchmark.

This year, however, many of these players could be forgiven for looking for those stolen market clues, with so few of them seeing the ball well and so much inscrutable day-to-day action penalizing caution and then boldness, whipsawing most everyone. The S&P 500 finished last week virtually flat for 2011 (down 1%, to be exact), yet along the way provided ample opportunity to get it wrong, rising in a gentle climb by 9% at its springtime peak, then dropping nearly 20% in a few months, followed by one of the best monthly rallies in market history.

ONLY 23% OF STOCK-FUND MANAGERS were ahead of the S&P this year through Nov. 30, according to Bank of America Merrill Lynch. This period ended with Wednesday's 4% surge, on the latest coordinated effort by central banks to flush cheap dollars into the banking system while Europe argues over more consequential measures.

That day nicely distilled the 2011 market: dominated by global monetary conditions and "policy responses," all producing a market move that virtually no one caught. Had some helpful spy noted at the crack of dawn Wednesday that half a dozen central banks would be expanding dollar-swap lines to increase liquidity in the system, how would the average fund manager have exploited this?

The S&P that morning opened immediately higher by about 4%, by which time almost no trading business had been done, and then the index just sat there all day, as the trading computers argued among themselves over fractions of an index point until the close.

This will, and should, give comfort to those owning such "quality proxies" as the Vanguard Dividend Appreciation exchange-traded fund ($VIG), which has nicely stayed ahead of the indexes this year.

But has this market not taught us the old baseball rule, that no team is as good as it appears during a winning streak, and none as bad as it looks while on a skid?

Read the article in full over at Barrons. ($SPY $SPX)

Don't forget to check out Michael Santoli on Streetwise in Barrons every Saturday morning.