Friday, February 01, 2008

Can this Bull Market get a second wind?

The market continues to show strength. I thought there would be some weakness because of Google's earnings miss and the poor econ. numbers. From all the blogs I read there are a lot of bearish commentary and predictions. I feel bearish myself too because we are having lower highs and lower lows in the daily and weekly time frames.

There are two blogs that have a different view. Carl Futia sees the S&P rallying to 1600 in 3-4 months. He has been steadfastly bullish through our recent decline. He gives his reasons in his blog for his forecast. Another blog that I follow is Between the Hedges. This is his major reason for believing that the bull market is not over. If his data is correct then I too find it hard for the market to break lower with all these bearish sentiment. What do you guys think? Are we still in a bull market or are we starting a bear market?

"The AAII percentage of bulls rose to 25.1% this week from 24.3% the prior week. This reading is still at a very depressed level. The AAII percentage of bears rose to 59.0% this week from 54.4% the prior week. This reading is still at an extraordinarily elevated level. The last time the AAII % Bears was this high was October 18, 1990 after Iraq’s invasion of Kuwait and before Operation Desert Storm began on January 17, 1991. The peak of the 1990-1991 recession also occurred during 4Q 1990 as GDP fell 3.0%. The S&P 500 rose 65% over the next three years after this peak in bearishness. Moreover, the 10-week moving average of the percentage of bears is currently at 50.9%, also an extraordinarily elevated level. It has only been higher one other period in its history, which was September 1990-December 1990. Moreover, the 10-week moving average of the percentage of bears peaked at 43.0% right near the major bear market low during 2002. It is astonishing that the 10-week moving average of the % bears is currently 7.9 percentage points greater than at any time during the bubble bursting meltdown of 2000-2003, which was arguably the worst stock market decline since the Great Depression.

Furthermore, the 50-week moving average of the percentage of bears is currently 40.7%, also an extraordinarily elevated level seen during only one other period since tracking began in the 80s. That period was December 1990-April 1991, right near another major stock market bottom. The extreme reading of the 50-week moving average of the percentage of bears during that period peaked at 41.6% on Jan. 31, 1991. The current reading of 40.7% is above the peak in the % bears during the 2000-2003 bear market, which was 38.1% on April 10, 2003. I find this even more astonishing, notwithstanding the recent pullback, given that the S&P 500 is currently 86.3% higher from the October 2002 major bear market lows and 13.0% off its recent record high.

Individual investor pessimism towards US stocks remains deep-seated and historical in nature, which bodes very well for further outsized gains over the intermediate-term. This is just more evidence of the current “US negativity bubble.” It is also noteworthy that as investor pessimism grows ever thicker as short interest soars to new record highs, corporate insiders continue to display downright giddy behavior with their recent stock activity during this pullback. The retail sector saw substantial insider buying over the last six weeks, notwithstanding the current extreme investor pessimism towards the prospects for consumer spending. The Morgan Stanley Retail Index is up 14.0% over the last ten days. During the 2000 economic downturn after the bursting of the 90s technology stock bubble, insiders were bailing in droves. I still expect US stocks to rise sharply later this year as the undying belief in an imminent recession begins to fade and the uncertainty currently surrounding the financial sector continues to lift substantially." - Gary at Between the Hedges

7 comments:

Meow said...

Just like popular sentiment gets too positive at the peak... same here, way too much negative sentiment, could mean we're at the bottom.

Though lower highs and lower lows do look like a textbook example.

Still, I say we're going higher this year.

LP said...

OBAT: I have the opposite view. I think we have another serious leg down in the making. Here are my reasons:

1) House values which spurred spending that took us out of the previous recession, is now declining. Which has two consequences:

- Reduced equity to borrow against.
- Hard to sell your home. Easy to buy but we have no cash left.

2) Credit cards are tapped out. Remember is the poor and middle class that spend money. The rich are much smarter and don't buy as many wasteful items. They tend to buy assets. We buy starbucks and all the other thing that makes us yuppies look elite.

3) Technically it's questionable if we are yet in a recession. We are current growing slowly but not necessarily at a negative rate. Granted the government number do lag a bit. However, market declines do not always predict recessions.

4) P/E - wow, can't belive I'm talking fundamentals. Well P/Es are still very high. There have been no strong bull markets that have started when valuations were above 11 or so. I forget the exact numbers. Basically we need to wash the excess out, shake out the retail traders.

5) This credit market will probably take at least 6 months to 1 year to write off all or properly value the $30+ trillion of CDO. Even if a small percentage of it is written off, it's creates a big enough dent to completely put some ibanks in the history books.

6) Bear markets don't go straight down. They go down violently and rise back slowly and then go back down. Basically take one of our short intraday charts and watch for retraces. This creates the illusion that we have bottomed but how may times have we seen a bottom and kicked ourselves for covering too early.

7) Talk to a normal person that's not all into the markets. They don't think we are in that much trouble. I think these political debates have made it much more obvious. But there isn't a sense of overt bearishness at the bball court or at church. Those are the people I use as the real contrarian indicators. Most of the people I know are tightening their belts but not even close to the way the did so in 2002.

8) The congress package of the $150 billion in rebates are financed by China. Basically we are borrowing from them to buy their goods and services.

9) Now while companies have warned many have still met expectations. I think we need to see about 2 or so disappointing earning before we see the bottom.

10) A typical bull market runs about 4 years and bear market 6 months to 1 year. This is the norm and it's cyclical.

11) Business have stopped spending.

12) These high oil prices are hurting people during this slow down.

13) Food prices are still going up and will continue to do so. Darn it I wish we were trading commodities.

Now I think there are a few things that need to happen but it will not happen fast enough.

1) Consumers need to reduce debt along with government.

2) Housing prices need to flatten out and stop declining.

3) The credit markets need to expand. There is still too much that's not know.

4) Business need to start spending. But they will not do so until they see that their projected revenues are no longer declining.

-----

Yeah sounds very bearish, but I think once we wipe out the garbage we will enjoy a very nice and strong bull market.

But I think is would be unwise to not let the excesses was out.

Having said all that I am really excited about this prospect. Think about all the bargains that we will be faced with in about 6 months.

LP said...

The average decline in a recession induced bear market is 30% with the low about 25% and the high 45%. But these are just numbers.

The reason I question Carl's charts is that we have seen real bottoms that assuage the fears of every institution to have tested multiple times. Pull up a monthly charts of the Dow over the past 60 years and look at every recession and bear market. There is a bottom, a test of the bottom which is usually slightly lower (lower low and bounce) than the previous bottom. And many times a third a test which is usually a slightly higher low.

Think if you have a 100 billion dollars. Would you invest a huge portion of that before you felt safe. It's human error to only take the recent data and discard previous data, even if past occurances have no bearing on future ones. However, it's more psychological.

OBAT said...

Nice thoughtful reply LP,

I agree with you that with our current fundamentals is hard for the market to continue its gains.

Looking at charts, it is hard to find any good stocks that have solid bases and have not made 300-1000% gains. I think we will see some nice setups after a bear market.

LP said...

totaly agree and I lok forward to the bargains.

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