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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (3585)	3/26/2001 4:40:14 PM
From: John Madarasz	Respond to of 33421

Fortunately, the news can only get better, and when it does, the shorts will be forced to cover - adding fuel to the eventual rally. Interesting counterpoint here to that article... schaeffersresearch.com Bernie Schaeffer: Magazine Covers and The Slope of Hope 3/26/2001 9:23:26 AM "Bull markets rise on a Wall of Worry; bear markets decline on a Slope of Hope" Unknown (but very wise) author Now that we're unmistakably in a bear market, it greatly amuses to find the legions who are "hunting for a bottom" (see feature article in today's Wall Street Journal C-section), desperately seeking vindication from contrarian indicators of investor sentiment. I literally screamed "buy!" after each and every one of the numerous bull market pullbacks in the 1990s because of the climactic bearish sentiment I was seeing in our sentiment indicators, such as the 21-day moving average of the equity put/call ratio. Climactic bearish sentiment on bull market pullbacks is an unambiguous and powerful buy signal. Ironically, many of the "bottom hunters" of 2001 were totally myopic to these sentiment-based buy signals in the 1990s. Why? Because they were too fearful to notice! In other words, they were part of the Wall of Worry! And now, in 2001, the "bottom hunters" are part of the Slope of Hope. How so? Because every thin straw that is held out by the market and every feeble indication that investors are turning bearish is viewed as a sign of the bottom. A great case in point was the market action last week, interpreted as follows by the bottom hunters: "Isn't it great that the Dow finally got smacked hard? That's got to be a sign the bottom is near! Isn't it terrific that the Dow's close on Thursday was only 19.9 percent below its closing high, rather than 20 percent? This means that there was no "official bear market" in the Dow! And how about those bearish magazine covers in the three news magazines. Everyone knows the market bottoms when there's a bear on the cover!" Let's ignore the atrocious inconsistency in the fact that horrible price action in the non-tech segment of the market is now being held out as bullish, when favorable price action in non-tech was previously held out as what was bullish. Instead, I'd like to focus on the magazine covers and their implications. In my presentations introducing investors to the world of sentiment analysis I focus on the contrarian implications of magazine covers, due to the simplicity of the concept and the fact that many times the forecast implicit on these covers is startlingly wrong with timing that is startlingly precise. When a financial trend is featured on a magazine cover, the chances are that this trend is already: Widely known Universally accepted In place for a decent length of time or very significant in magnitude The idea is that such trends are ripe for a reversal by the time the magazine cover hits the newsstand. Hence the contrarian implications of the magazine cover. So how about those bearish news magazine covers? Is it widely known and universally accepted that we're in a bear market? No and no. Witness the blather about the Dow escaping a bear market last week and the forecasts that remain in place by many of Wall Street's top strategists that the Nasdaq will double by year-end. And witness the fact that investors finally trickled some money out of equity mutual funds in February, after watching their tech-laden fund portfolios drop by 50 percent or more over the past year. "Hope" is still the byword, not "bear market." But even more importantly, the magazine articles underlying these covers were not particularly bearish on the market! Let's take a look at some quotes from the Time piece. "If all this gloom has you ready to cash in your stocks and put the money in a mattress, stop right there." "That's not to say there won't be more negative news; there almost certainly will be. But at some point the stock market will have anticipated the worst and begin to move higher, even in the face of recession-like conditions. Is that time at hand? A lot of people think so." "Most important: given time, falling interest rates almost always work, and with inflation low the Fed has room to cut away." "Macro issues aside, many stocks now trade at bargain prices. Sell now and you risk selling at the bottom." Do you think many Time readers were motivated by this article to liquidate their stock holdings? This wasn't a bearish article; it was a "bottom hunting" article! "Hold on," you may say, "aren't you parsing this a little too much by requiring that we look at the article and not just the cover with the bear on it?" Good question. I make it a point to inform the audience at my presentations that, yes, it is often important to read the articles. And I cite as a prime example the Time cover in December 1997 depicting Andy Grove of Intel as "Man of the Year." The article inside was bullish on Andy Grove but it was bearish on Intel stock that it deemed "overvalued." And over the following year Intel shares proceeded to nearly double. So here are my problems with the "bearish covers indicate a 2001 market bottom" scenario. The covers may have looked bearish, but the cover stories were not. Everybody and his or her great grandmother is now chirping about the bullish implications of these covers. The "slope of hope" of bear markets is alive and well. The degree of bearish sentiment needed to mark a bottom in a bear market exceeds that which is needed to mark a bottom in a bull market pullback. Bearish sentiment is to be expected in bear markets, and as such there must be an "off the charts" extreme in bearish sentiment at bear market bottoms. Or the bear market becomes the "slow bleed" type of the 1970s in which the bottom is marked by an extreme in disinterest rather than an extreme in fear. Neither of these sentiment-based conditions for bear market bottoms is even remotely in place now. - Bernie Schaeffer Best Regards, John M.