This is an interesting read. Of course I don't agree with his conclusions, but they seem to be based off of government lies that he takes at face value. Otherwise, I think he see's the doom and gloom pretty accurately. I highlighted some interesting parts.
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So now that we've got those nasty earnings warnings out of the way, the "good guys" will begin reporting those solid earnings and the market will have no choice but to rally. Besides, we're about to move into that extremely seasonally strong November-January period, and everybody knows that we bottom in October and then rally big for the next three months.
If this rationale for the bullish case sounds familiar to you, it is with good reason. First, I've made noises to this effect in my various TV appearances over the past month as well as in my market commentary in the October issue of The Option Advisor. And second and perhaps of greatest importance, this has become a very widespread mantra in the financial media.
If you're among those who've followed my thinking over the past couple of decades, you know I have a great deal of difficulty swallowing investment scenarios that become widely popular. So it should come as no surprise that I'm calling my recently held beliefs into question, as it is my responsibility to you and to my discipline as a contrarian and a student of the markets to avoid anything resembling a dogmatic and rigid approach.
What's causing me concern beyond the "feel good mantra?" Complacent investor sentiment, for one thing, viz.:
1. As of Friday's close, the CBOE Volatility Index (VIX) had rallied by a paltry 50 percent from its August bottom despite the weak market. And it wasn't until midday today that the VIX took out its September highs.
2. The sentiment polls show no signs of climactic bearish sentiment. According to Jeff Cooper of TradingMarkets.com, "In 1994, there were 45 weeks in which bears outnumbered bulls among investment advisors. This year, we have yet to see a single week in which bears outnumber bulls." And the beat goes on, as it was just one week ago that there were more than 50-percent bulls and less than 30-percent bears in the Investors Intelligence survey.
3. An America Online investor poll over this past weekend to which nearly 20,000 responded gave new meaning to the phrase "don't worry, be happy." A stunning 73.7 percent felt the market would be at least five percent higher in the next three months, while an equally stunning 6.4 percent saw the market dropping by more than five percent.
4. The financial media's consistent "glass is half empty" negativism that had accompanied this bull market all the way up to provide a solid "Wall of Worry" underpinning has degenerated lately into mushy market cheerleading. Nowhere is this more evident than in the coverage of the recent debacle in the tech sector, in particular the implosion of PC stocks. A plethora of bullish magazine cover stories on Steve Jobs has graced newsstands this year, and in an event of supreme irony, The Wall Street Journal reviewed the new Second Coming of Steve Jobs book on the very day Apple Computer's share value was sliced in half. But it gets worse. Despite profit warnings from Apple, Intel, and Dell, the media refuses to believe there is an industry-wide problem. The current issue of Fortune features an extremely bullish cover story on Dell, and even the gloomsters at Barron's have managed to cast their lot with the PC industry in an article entitled "False Alarm." By way of comparison, recall the 1997, 1998, and 1999 market bottoms, when the media's attitude toward the techs was similar to their treatment of cigarette smoking and the Ebola virus.
5. To add insult to the injury in #4 above, option players in dead cats like Apple and Intel have been trading them heavily on the call side and have often bid call premiums higher than put premiums.
6. I won't even mention the new book that has been widely reviewed in recent weeks that's forecasting Dow 22,000.
As I've stated so many times in the past, complacent sentiment during a roaring bull market that keeps scaling new heights is far less of a concern than complacency during weak markets. And the market's technicals right now are pretty awful:
1. The Nasdaq Composite Index (COMP) and the Dow Jones Industrial Average are each trading below their 20-month moving averages, which I consider the line of demarcation between a bull and a bear market. The last time the Dow closed the month below this moving average was in September 1998, and it was August 1998 for the COMP. Note that monthly closes are more significant than intra-month levels but there is certainly cause for concern.
2. Only five of the 18 market indices and sectors I regularly follow (securities brokers, utilities, drugs, biotech, and energy services) are in clear bull markets, which means that they are trading above their rising 10-month moving averages.
3. Per Jeff Cooper again, every decline this decade has been greeted with new highs no later than four months after the lows. And September was four months after the May lows. Finally, there's that "old reliable" – the Fed. The same Fed that has increased rates six consecutive times with no evidence of inflation and no evidence that strong economic growth will ever cause inflation. And the same Fed that just proudly announced that it will maintain its "tightening bias" despite the fact that the markets are screaming (in the form of inverted yield curves) that the Fed's policy is already too tight. And I won't even mention the fact that during the first weekend in October 1987, Greenspan made noises about further tightening.
This all said, I'm not about to ditch the long-term bullish posture I've maintained since the day after the 1987 crash. This economy will survive the fools at the Fed, because as Lawrence Kudlow likes to say, the Internet is more powerful than the Federal Reserve. I don't believe the era of strong growth with little or no inflation is over, nor do I believe that all the naysayers and outright bears that persist among us are about to achieve any kind of permanent vindication.
This market will bottom in its normal fashion, accompanied by a huge wave of fear once again led by the financial media. My biggest concern right now is that the market-bottoming scenario has become too pat, and the fear levels are not where they need to be to justify a bottom right here and right now.
But help is on the way. Chris Johnson states in our Monday Morning Alert today that the 21-day moving average of the CBOE put/call ratio is now a robust 0.563, which is in line with the heavy fear-based put activity that occurred at such major bottoms as April 1997. But Chris also points out that "this indicator can often be early, so a good deal of short-term weakness may be borne out before the long-term bull settles back into place." I couldn't have said it better.
- Bernie Schaeffer |
