"Bear-market rally? Or major new bull market? One of the
distinguishing characteristics of the former is an excessive eagerness to
jump on the bullish bandwagon. At the beginnings of the latter, in
contrast, advisers are more reticent -- turning bullish more slowly and
begrudgingly.
"It is worrisome that two out of four sentiment measures I analyzed
are showing increases in bullish sentiment since the March 9 low that are
markedly higher than the typical experience at the beginnings of prior
bull markets."
"The bottom line? It is difficult, but not
impossible, to argue that we are in a new bull market. It is more likely
that we're in a bear-market rally."
I'm also a little concerned about the volume recently, going down as the
market's been going up. In the 'Old Trader's
Handbook,' it says rallies in bear markets die on low volume. We may be
rounding that top right about now."
On his pullback prediction of a fortnight ago: "If you look at both
the S&P and Dow, they're forming a sort of canopy top. We're within
days of finding out...whether we're topping and rolling over."
"The current pop in the market is not dissimilar to the many bear
market rallies between 1929-1933, where signs of economic stabilisation
were met with 25% plus rallies... This optimism was subsequently
crushed."
A reversal will cause a "catastrophic loss of confidence" -- to
date it has only been dented by poor news, not wrecked by it.
I suspect these swings tell us more
about market psychology rather than valuation. There are two distinct investment
constituencies: value investors and hard-core bears, which have been
pulling indexes in both directions.
But he's impressed with the strength of the March rally, and thinks it
could reach Dow 9,000-10,000. However, he warns that a 10% retrenchment
will cause him to bail out quickly.
"We believe these are classic signs of a speculative rally. Too many
people were buying 'lottery tickets' such as Citibank at 99 cents and are
now enjoying big gains. This has frustrated those that try to separate
good from bad.
"We've done this twice in the last six months -- huge rally of
20-plus percent in stocks -- only to give it back to have a new low in the
markets."
"The fact that the market is going higher in the face of the swine
flu news shows that the market wants to go higher."
"We haven’t had capitulation. Recession is getting worse. Risk of the
lack of confidence in UST. We still have stocks trading at 1.7 times book
value. This market’s not going to bottom till it
gets to below book value, 6- 10 times earnings. We have all the
evidence in the world that because the market’s decline one year doesn’t
give us the right to rally again."
"The Lowry’s statistics do not favor the argument that a new bull
market has started. Normally, based on the long history of the Lowry’s
studies, when a new bull markets starts, their Buying Power and Selling
Pressure Indices move apart by roughly the same number of points.
"The fact - since the March 9 low, Lowry’s Buying Power Index has
gained 57 points, but their Selling Pressure Index has only dropped 20
points. This is at sharp variance with all other bull market starts in the
Lowry’s history.
"Basically, when a new bull market starts, the background is that the
urge to sell has been exhausted. The pressure to press that market down
further has disappeared. Thus, the market is left in the hands of those
who wish to buy. In the current case, there is still a potential supply of
stocks to be sold. In other words, the situation is not correct for the
start of a new bull market, based on 76 years of the Lowry’s data.”
"There remains skepticism toward the upside fun, especially among
professional investors who haven't owned enough of what has led this move,
have little company-level conviction in the fundamentals and seem to want
a chance to buy them lower. This is a net positive.
"At the same time, retail-tinged, somewhat frothy activity is percolating.
This happens both in market head fakes and early in durable up trends, but
it bears watching. Discount-broker volumes have climbed smartly in recent
weeks while overall volumes have lagged, partly a benign result of reduced
activity from recently bruised long-short quantitative funds.
"The much remarked leadership of low-quality,
low-priced stocks (a normal aspect of rallies from depressed levels)
typically fades within a few months even in strong up markets."
"It is not that consumption has bounced back in a strong way; rather,
production has fallen off a cliff, so inventories are now very, very low
relative to spending. Businesses have over-estimated the weakness in final
demand", according to Tim Bond of Barclays Capital, and the gap has not been this extreme since the bottom of the
1974 economic recession -- which coincided with a substantial rebound in
the U. S. stock market.
"That said, we continue to believe the
bear-market “lows” are behind us; and that the worst of the recession is
in the rear view mirror (except for employment numbers).
"The call for this week: The longest “buying stampede” chronicled in
my notes is 41 sessions. Today is either session 39, if you measure from
the intraday low of March 6th (666 basis the S&P 500), or session 38
if you measure from the March 9th closing low of 676.53. In either event,
we have made a lot of money over the last eight weeks and continue to
think the trick from here will be to keep that money. Longer-term, we are pretty optimistic. Near-term, we are
cautious. If I had to buy something today it would be the
emerging markets like Brazil since most of the emerging markets didn’t
make new reaction lows in March like the S&P did. Moreover, I think
they will be the leaders in the next bull market."
"On normalized profit margins, valuations are above the historical
average, and prospective long-term returns are below the historical
average. Overall, I expect the probable total
return on the S&P 500 over the coming decade to be about 8% annually,
provided we don't observe much additional deleveraging in the economy. At
the 1974 and 1982 lows, based on our standard methodology, the S&P 500
was priced to deliver 10-year total returns of about 15% annually. While it has become quite popular to talk about 1974 and
1982, the stock market is presently not even close to those levels of
valuation.
"Meanwhile, market action in recent weeks has been excellent from the
standpoint of breadth (advances versus declines), uneven from the
standpoint of leadership (where much of the strength has been focused on
speculation in companies with extraordinarily poor balance sheets), and
rather uninspiring on the basis of trading volume."
"This rally is starting to feel a bit overdone. When you look at the
indices they are starting to roll over slightly. The rate of ascend is not
that quick it was a few weeks ago. It also started off with a lot of short
covering and there’s been a sector rotation from the defensive into the
cyclicals. Well I think the people might be getting ahead of themselves.
Second derivative argument: time to buy is when the rate of growth slows.
That argument makes a lot of sense in a normal recession when you are
looking at a 2-3 % decline of GDP. When you are looking at a 5-6-7%
decline.. it may be a little too early to buy."
"At Fullermoney, we maintain that the S&P
500 Index will most likely hold above its March low, as it continues to
develop a base formation. The main reason, previously stated, is
that we are witnessing the greatest attempt at asset reflation in human
history. In comparison, it makes Greenspan look, well … almost Austrian
and the USA is certainly not the only country engaged in a record
reflation. The secondary reason is the record levels of cash held by
institutional investors."
"The banks are also key to the rise in sentiment. Fears of
nationalisation or some going out of business have receded. Corporate
earnings may still be bad, but they are not as bad as they were in the
fourth quarter of last year. Markets tend to move
up before economies do. We think the markets may go on rallying for
another six months."
"Big money investors have been on the
sidelines. Big-money investors have been on the sidelines through
this entire move. From our lens – and you can see this clearly from the
twice-monthly NYSE data – the buying power for this market has actually
come from severe short-covering as the bears head for the hills.
"By and large, this rally has been a clear
technical event. Gaps get filled rapidly and the primary source
of buying power seems to be coming from a huge short-squeeze. To be sure,
there is always the chance that the dry powder (money on the sidelines) is
put to work and investors chase this rally. And nothing says that the
S&P 500 cannot go as high as the 200-day moving average of 970 over
the near term. We have seen these kinds of rallies in the past – but the
fundamental downtrend was obviously still intact.
"Stock market not good at predicting inflection points The stock
market’s track record is just about as good as the economics community at
predicting the inflection points in the business cycle – and that’s not
very good.
"Forward P/E multiple of 15x operating and 30x
on reported EPS are not that compelling. So, we do not have a
strong valuation argument. We do not have a strong earnings argument. The
seasonals ("sell in May”) are about to become less compelling too.
"New lows in S&P won’t happen as soon as
we thought. We would, at the same time, acknowledge that if the
terms of engagement have changed, the Obama economics team and the Fed
have made it exceedingly difficult for the shorts to make money in this
market. Tail risks, notably in terms of the banking system, have been
removed. This, in turn, does mean that even if we break to new lows in the
S&P 500, it probably will not happen as soon as we had thought.
"The worst is over. In any event, the
economy has certainly passed its worst point of the cycle even if we do
not yet see the bottom that many others do at this time. And it may very
well be that we overstayed our bearish call on the equity market and that
the lows were turned in on March 9. Many pundits who have been around far
longer seem to believe that, and they could be right. "
"We are in year 9 of an 18-year secular bear
market. The S&P 500 peaked in real terms back in August 2000.
Adjusted for the CPI, it is down 58% since that time. So, we would say
that we are in year 9 of what is likely to be an 18-year secular bear
market, because if you look at long waves in the past, they tend to last
about 18 years with near perfection.
"Past the half-way point in the recession. First, our in-house model
of predicting where we are in the cycle, for the first time, gave us a
signal late last week that we are past the half-way point in the
recession. Considering that the stock market
bottoms 60% of the way through, this is an encouraging signpost.
"Stock market has lagged relative to other
asset classes
"All an equity bull really has to do is point to the fact that the S&P
500 last September was trading around 1200. The only difference is back
then we were looking at it from the perspective of being 20% off the highs
whereas a move back to September levels, which, after all, would only
mimic what many other market indicators have accomplished, would be viewed
as an 80% surge off the lows not to mention another 35% potential upside
from where we are today. Even the CRB raw industrials are now back to
where they last October when the S&P 500 was hovering around the 950
level. So again, if we were equity bulls, and maybe
we should be, we would simply point out that of all the asset classes that
have bounced back to life, the stock market has actually been a laggard.
"We could be on the precipice of a cyclical upturn. Investors have
been able to price out financial tail risks. The market is gravitating to
a new mean. Still not sold on the bull case for equities."
"On the sentiment front, the CBOE Equity Put/Call Ratio, the AAII Bearish
Sentiment Survey and the VIX’s deviation from its 50-day moving average
have all moderated from constructive levels to more neutral levels. …
these indicators are not at levels that would suggest sentiment is overly
bullish yet, but their deterioration is enough cause for concern that a
corrective wave may occur."
"I look at three main things Worst 10 years ever for stocks in
America. 57% decline is the worst bear market ever. Sentiment extremely
negative. Valuations are at extremes. I do not spend time looking at
economic data. Though even here the second derivative is changing
rapidly."
"Given that the broad market -- the Standard & Poor's 500, for
example -- has not been able to follow the Nasdaq with a breakout of its
own we cannot chase performance. The risk is too great.
"There is a technical tendency I have observed over the years -- a
weak market does not hang around resistance for very long. Weak markets
run to resistance and then fall away. The reason is that strong bearish
hands take immediate advantage of perceived high prices to sell and sell
heavily. Timid bears are given little chance to sell comfortably.
"With the S&P 500 spending several weeks just below resistance,
there seems to be little interest on the part of the bears to step up
their selling. As we know, there are two sides to any trade. While it may
be true that the bears are not aggressively selling, it also seems true
that the bulls are not aggressively buying. Wednesday morning's nice rally
lacked volume support to suggest that there was no real enthusiasm to own
stocks in anticipation of a significant continuation of the rally.
"For the S&P 500, the argument for a new leg up will only be
valid if and when the index closes at a new high with strong volume
support."
"Using current valuations, if one were to
calculate the P/E multiple on 2009 earnings, one lands up with 14x using
operating earnings and 30x using as reported earnings. We will leave
investors to make their own judgment but P/E multiples of 30x certainly
scream bubble to us.
"The recent secondary offering by Goldman
Sachs, could well mark the top of this bear market rally because
GS, we believe would only issue equity at these valuations for two
reasons, namely because it needed to as losses on its highly illiquid
Level 3 assets continue to mount, or because it saw its equity valuation
as being grossly overpriced.
"Time will tell, how significant this GS top will be but for now it
makes us very wary of equities, especially US financials, as they have
become the playground of day-traders."
"There's a strong tendency for each new presidential administration
to do whatever it takes to make sure the economy and market will be strong
when reelection time rolls around four years later. Of the 19 bear markets
since 1917 -- I define a bear market as one in which stocks fall at least
20% -- 15 ended in the first or second year of a presidential term, so that
the economy and stock prices had recovered by the time the next election
took place.
"Add in the gigantic stimulus plan that began in the last year of the
Bush administration -- usually such programs are smaller and start in the
first or second year of the new president's term --
and the bottom could be seen in 2009, perhaps in October, after a retest
of the March low."