SuttonWatch.Net: U.S. Stock Market: FOMC, ZIRP, Alibaba, Scotland, and Other Related Topics

If you were fully invested in the U.S. stock market to begin the week last week, you were treated to the best of all worlds in terms of news that could impact equity prices:

1. At this past week's FOMC meeting, the Federal Reserve maintained its Zero Interest Rate Policy (ZIRP) and kept market-friendly language (ZIRP "for a considerable time") despite hints in recent speeches by several Fed governors that maybe interest rates might be raised sooner than most Fed watchers expected.

2. The largest IPO in history, Alibaba, was extremely well received. The Company's $21.8 billion offering was priced at the high end of its expected range ($68/share), and it still managed to post a 38% gain in its first day of trading on the NYSE (closing at $93.89/share).

3. Scottish voters said "NO" to a referendum seeking Independence from the United Kingdom for Scotland. The final vote count was 55% NO versus 45% YES.

There were many other positives for U.S. stock market investors this past week, but these were probably the biggest three potential market moving events.

So what actually happened to share prices? How did U.S. stock market investors react after getting EVERYTHING they wanted (and needed to hear)?

If you look at the Dow Jones Industrial Average, it was a solid positive week for investors at +1.72%. However, on my screen the DJIA was the single best performing index while other closely watched benchmarks painted a different picture. The S&P 500 Index posted a decent gain of +1.25% on the week, but the Nasdaq Composite Index was barely positive at +0.27% on the week. And the Russell 2000 Index was actually DOWN 1.18% on the week. Incredibly, for the full week, declining issues outpaced advancing issues on both the NYSE and on Nasdaq. And there were actually significantly more new 52-week lows on the Nasdaq than new 52-week highs (232 vs 174, respectively). On Friday, September 19th, the DJIA closed "flat" while every other major index actually posted a loss on the day despite opening sharply higher in early morning NY dealings!

Yes, there was a lot happening last week. And yes, the news was mostly bullish for U.S. stock investors. However, stock prices were just mixed-to-mostly-lower, which should be of great concern to anyone who is fully invested.

I think one particular story from last week did not get the attention it deserved. CALPERS, the largest pension fund in the U.S. with $300 billion under management, decided to exit its investments in hedge funds. CALPERS has $4 billion allocated to hedge funds, but after years of "underperformance" hedge funds maybe too complex and too costly according to CALPERS management. According to research from Wilshire, average annual public pension fund gains from hedge funds were just 3.6% for the 3-year period ending March 31, 2014 as compared to 10.9% from private-equity investments, 10.6% from stocks, and 5.7% from fixed-income investments.

CALPERS is often on the leading edge of investment management trends and it began allocating pension money to hedge funds in 2002. How will CALPERS exit from hedge funds impact the overall U.S. stock market (if at all)? Let's do some back-of-the-envelope calculations, just for fun. It's already been reported that pension funds in Ohio and New Jersey are also retreating from hedge funds, so I don't think it's a stretch to conclude that many other pension funds will soon follow. So here we go! Let's use a conservative 10x multiple for CALPERS effect on the market place in this particular case. This means that $40 billion will be withdrawn from hedge funds as "copy cat" pension fund managers follow CALPERS lead. While I think this is a conservative number, we'll go with it for this example. And then let's say that the average hedge fund is leveraged 2 to 1 in stocks. This is a complete guess, of course, but I think these last two estimates are reasonable (if not conservative). So where does that leave us? CALPERS announcement that it will exit its $4 billion investment in hedge funds could conceivably lead to $40 billion of withdrawals from hedge funds by other pension fund managers which would then mean that hedge fund managers would then have to liquidate $80 billion in investments (most of which are in stocks). Like I said, these are back-of-the-envelope calculations, but I think they are very conservative. I actually think that hedge funds may have to liquidate more than $100 billion in stocks as pension funds follow CALPERS lead. Should be interesting!! In the interest of full disclosure, I currently have a significant short position in the S&P 500 Index using the double-short Pro Shares ETF (symbol SDS).

Here are the latest relevant charts from my computer trading system:

1. New York Composite Index - Daily chart sell signal triggered Friday, September 19th.

2. Dow Jones Transportation Average - Daily chart sell signal triggered Friday, September 19th.

3. Philadelphia Semiconductor Index (SOX) - Daily chart sell signal triggered Friday, September 19th.

4. Russell 2000 Index - Monthly chart sell signal triggered in July 2014, the first monthly chart sell signal since July 2007.

In addition to the sell signals on the charts below, daily chart sell signals were triggered at Friday's close in the following stocks and indexes: BKX, DJTA, NY Composite, SOX, IYT, ABAX, ABT, AIR, ALTR, AXP, BAC, BEN, BRCM, CB, CMC, DE, EMC, EQIX, JPM, KEY, KR, LL, LLY, LUV, MAR, MCHP, MMC, MS, PFE, PGR, QCOM, SNDK, SYK, TXN, UPS, and XLNX.