Another strategist projects a bear market rally soon:
IS THE BAD NEWS FACTORED IN FOR NOW? April 6, 2001
Another week of little to cheer about in the economy, and falling stock prices, has investors beginning to pull money out of the market at a
faster pace. Equity Trim Tabs Inc. reported $14.8 billion flowed out of stock mutual funds this week compared to $1.4 billion the previous
week. While not an alarming flight of capital to the safe haven of cash, it’s certainly the opposite of conditions at the market top a year ago
when $35 billion and more was pouring into stock funds each month.
Obvious by hindsight, it would have been wiser to be pulling money out a year ago. Only time will tell if it’s wise to be doing so now.
It’s not the only situation that’s now directly opposite to conditions at the market top a year ago, and some of those conditions are more positive than negative.
For instance, the S&P 500 and Nasdaq are now as oversold under their 200-day moving averages, as they were overbought above those averages at the market
top last year. A year ago investors were ignoring warnings of the risk in the overvalued market, seeing only the positives, and insisting the market could only
continue higher. Now they disbelieve any talk of the market being near even an intermediate-term low, see only the negatives, and insist the market can only
move lower. (There’s an old adage on Wall Street that the market will do whatever it must to make the majority opinion wrong). Undervalued stocks are now
being sold as relentlessly as overvalued stocks were being bought a year ago. And probably of most importance, a year ago the Federal Reserve was raising
interest rates in a determined effort to slow the over-heated economy, while the Fed is now cutting interest rates (three times since January) in an effort to
re-stimulate the economy.
It’s also interesting that a number of the wise old foxes of the market who refused to get caught up in the final excitement at the top last year, warning it was
unsustainable, have reversed their bearishness in the last week or two. Now bullish and believing at least a temporary bottom is in are the likes of David
Dremen of the Dremen Value Fund, and Steve Leuthold of the Leuthold Group. And reports are that mega-billionaire investor Warren Buffett, who had raised
cash levels to $30 billion by selling heavily into the final rallies of the bull market, saying at the time, “I dislike holding cash, but I dislike being foolish even
more”, has been moving to the buy side.
This week started off with more gloomy news. On Monday, the National Association of Purchasing Managers Index showed manufacturing activity declined
for the eighth consecutive month in March. On Tuesday, the Commerce Department reported factory orders declined again in March. More companies warned
their first quarter earnings would not meet Wall Street’s estimates. And the stock market tumbled further.
But after the market closed on Wednesday, Dell Computer repeated the upbeat earnings projections it made several weeks ago, retailers Best Buy, and Bed,
Bath & Beyond, posted earnings that beat Wall Street’s estimates, and Alcoa, the first of the Dow stocks to release 1st quarter results, came in with earnings
that were also better than expected.
Bingo! The market, starved for good news, exploded upward on Thursday. The Dow and S&P 500 gained a huge 4% for the day, while the Nasdaq produced
its third biggest one-day gain, 9%, in history.
But investors hardly had time to breath a sigh of relief when the Labor Department hit them over the head Friday morning with the release of the Monthly
Employment Report for March. After the previous report showed a surprising jump in new jobs created in February, this month’s report showed a huge
decline of 86,000 jobs in March, the largest monthly decline since 1991.
Investors didn’t know how to take the news. On the negative side, the plunge in jobs adds considerable fuel to the thought that the economy is well on its way
into recession. But on the positive side for investors, if not for consumers, it puts considerable pressure on the Fed to cut interest rates still further to stimulate
the economy, and history shows that the stock market is almost always higher three months, six months, and a year after the Fed begins cutting interest rates.
And so the uncertainty continues.
But I believe conditions have probably been set up well enough to produce a meaningful rally for a month or two.
However, if it does take place, such a rally should be watched closely. In spite of its 25% decline from the market top a year ago, the S&P 500 is still selling at
a lofty 22 times its earnings, versus its long-term average of selling at 15 times earnings. So, while the market’s plunge has probably factored in the negatives
enough for now to create the opportunity for a good rally, it’s quite likely any profits from such a rally will have to be taken in a timely manner, as I do believe
the downside will resume through the summer months.
Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at WWW.StreetSmartReport.com, and author of
Riding the Bear - How to Prosper in the Coming Bear Market. |
