Whither Doom?
The point about investors' recent propensity to "talk the bullish talk" but refusal to "walk the walk" is compelling. But the sentiment figures still belie the widely held view that negativity prevails, which suggests we've reached a meaningful bottom, according to Bernie Schaeffer, senior editor at Schaeffer's Investment Research, a Cincinnati-based newsletter publisher that focuses on the options market.
After going neutral on Dec. 1, Schaeffer adopted a bearish stance on the S&P 500 last week for the first time since October 1987.
"From my perspective the probable downside at this juncture strongly outweighs the probable upside," he wrote. "I feel there are major risks to this economy and major risks to corporate earnings that are not being sufficiently recognized" by investors and analysts.
Schaeffer's switch from neutral to bearish was predicated on the S&P's violation of its 2000 low of 1254.46 last Monday, when it traded as low as 1241.73 before rallying to close at 1267.65.
The newsletter writer forecast the index could trade as low as 1000 -- or 20.2% below today's close of 1253.80 "depending on whether investor sentiment reaches the climactic negative levels that can support the case for a major market bottom. I feel we're nowhere close to such a 'capitulation point' right now."
Schaeffer was unavailable for additional comment, but I did speak with Joe Sunderman, manager of research at the firm.
In past declines, bullishness in the Investors Intelligence survey has "always gone into the high-20% [range] before the market found a bottom," Sunderman said. "We haven't even come close to those kind of levels" in the current downturn.
Schaeffer's Investment Research focuses on the Investors Intelligence data because it has been around since the early 1960s, and thus has a longer track record than other commonly cited sentiment gauges.
This brings us to the issue of capitulation, a term that is bandied about without much explanation. To many, capitulation suggests some sort of market meltdown or crash. Several readers have noted, correctly, that not all bear markets end with such upheaval. From a contrarian point of view, the fact so many folks are expecting such capitulation means it likely won't occur, they say.
But to sentiment watchers such as Sunderman, capitulation means (in this case) steadfast bulls turning bearish, which doesn't necessarily have to occur after a selling panic. It could result from a "slow bleed" or a market that goes sideways for an extended period. "I don't know what's going to be the deciding factor to change the mindset" from bullish to bearish, he confessed, but expressed certainty it will change before a true bottom is in hand. |
