Get Shorty rallies
One group, as the accompanying chart makes clear, who should not have been caught off balance by the quantum leap
higher were the Wall Street strategists. Those stalwarts, so often wrong but never in doubt, are still staunchly convinced, as Richard Bernstein of Merrill Lynch observes,
that "the current environment represents one of the best times to buy equities in the last 16 to 17 years." Bernstein, as it happens, is Merrill's chief U.S. market
strategist, but don't hold that against him -- he's not a raging bull.
In fact, he's an eminently sensible type, who in contrast to his fellow seers, is
recommending only a 50% commitment to equities, far below the nearly 70%
urged on investors by the bulk of Street strategists. The chart, with a few
amendings by us, is his handiwork, and traces the strategists' consensus from
1985 through April 30 of this interesting year.
The extreme bullishness of the strategists is a bearish indicator, just as extreme
bearishness on their part is a reasonably reliable buy signal. As Dick Bernstein
marvels in his latest commentary on the indicator: "The current reading is again
among the most bullish in the indicator's history."
He goes on to point out that "overall equity-market valuations remain
extraordinarily stretched. The plain vanilla P/E ratio of the S&P 500 remains
about the highest in history, and our Dividend Discount Model suggests a very
high probability that bonds will outperform stocks."
Seemingly, investors, their ardor dampened after Wednesday's orgy of buying,
began to consider some of the cautions that informs Dick's view. And the
advance showed the same conspicuous lack of follow-through as similar
eruptions in recent months. Sad as it is to relate, the rally, spectacular as it was,
shapes up as another of Wall Street's now familiar here-today-gone-tomorrow
numbers.
The reason for this lamentable failure to mount a sustained move up likely has
to do with the source of these vigorous but short-lived spurts. In their own way,
these are "Get Shorty" rallies. The shorty in this case happens to be the short
sellers, and there are a mess of them out there; in fact, at last report, the short
interest was at its highest ever.
A notoriously jittery lot, consigned by the nature of the tax code to short-term
profits and with an exceptionally low tolerance for pain, short sellers scuttle for
cover at the slightest provocation, hoping to live to short another day. And as
the market soared last week, so did the urgency with which they sought to buy
back the borrowed shares they had sold.
A wise friend of ours points out, moreover, that the increasing tendency of
bearish pros to sell the indexes instead of individual stocks adds to the velocity
and ferocity of the upside thrusts in the Dow, S&P and Nasdaq. The Get
Shorty rallies, as Wednesday's demonstrated, can be great pyrotechnics, but
they're not the stuff of which bull markets are made.
more can found at:
ragingbull.lycos.com |
