Don Hays mea culpa
forums.delphiforums.com
Persistently bullish Hays finally says he is sorry about his calls over the last 10 months. His "mea culpa" has been a long time in coming as he continues to rave about his favorite indicators like the fabulous ARMS! Glad I don't follow his advice but feel for those who do.
Regards,
Phil
"I couldn’t be sorrier that I have been so bullish for the last 10 months, and that many of you are also suffering with me (and maybe because of me."
"The Lemmings Are Stampeding
Business Week Cover Goes All-Out Bearish
by Don R. Hays Summary: The fear is intense, as baby-boomers and their older cousins see a threat to their retirement plans. If everyone else is headed for the cliffs, there must be a big problem, RIGHT?? Business Week Cover is legendary at calling tops and bottoms, and this week’s cover is a classic. The market statistical evidence is overwhelming. Major chart trend lines penetrated last week, and hedge funds doing their chart-following dance caused intense volatility, but value always wins out. I will show several valuation measures below. Economic data showing persistent and healthy gains, with technology leading the way as it has for the last decade. The entire country is now just as engrossed as it was in the spring of 2000, but on the opposite side of the aisle. You can see the amazing transformation in the chart that shows the 15-day total of the put/call ratio that is on our website under this link: haysmarketfocus.com You can see how this ratio of fear to greed erupted to very high levels in 1994 as Greenspan had convinced the Street that he would chop the economy off at the knees with higher, restrictive interest rates if it grew above a 2% real rate, so when he started to move rates up, despite an amazingly powerful new trend in productivity evolving, the option players and the investing public panicked. Those months of 1994 were very painful. But in the following 6 years, even though this trend of fear to greed experienced volatility and the market had some dramatic declines, i.e. 1996 and 1998, very gradually that wall of worry generated in 1994 began to erode into optimism and greed. It reached its epic in March 2000, as it fell from its original 100%+ level of six years prior to 42%. The lemmings were scrambling to climb on board. After all, the market had made fools of all the bears for the last year as they had missed huge gains, so this MUST BE something special—a new era they called it. How the world has changed. We now have rebuilt that wall of worry, and instead of frantically climbing on, they are frantically trying to get off. After all, the bulls have been so wrong for the last year, so there must be something wrong. This is not just one indicator I’ve pulled out of left field to prove my bullish point. I am as frustrated, or even more so, than I was in February and March of 2000. I am definitely humbled. My bullish case has been proven to be wrong in virtually every index, as all except the Dow Transports, the S&P mid-cap, the S&P small-cap, and Value-Line Arithmetic have dropped under their September 21, 2001 low. I have been heartened by four major upside one-day reversals in the last four weeks, only to see them fail in the next few ensuing days. So in my beat-up state, I am an easy prey for those lemmings that seem to be so content to join the stampede. And so are you. In the last four days, I have never heard so many of my social peers that are just ready to “cash out.” Mutual fund statistics show a big outflow of redemptions. The American Association of Individual Investors has just registered the highest bearish sentiment over the last one week and three weeks of any time since 1992. You can see that on this link: haysmarketfocus.com But I really don’t think that is the driving force for the recent carnage. It is always easy to blame the hedge funds for anything (and they probably deserve much of it) but these wheeler dealers flip in and out with quick changed of trends and opinions. They have stop-loss disciplines rigidly set as their mainstay. With 6000 hedge funds today, I’m sure all those one-day reversals have tossed them around in a major way in the last 9 weeks. So when the trend-lines were violated on option expiration day (last Friday,) they hit the chutes, seeing shadows of another October 16, 1987—a previous option expiration day that preceded the big crash day. On Friday, the equity put/call ratio hit 108%. This is the third penetration of this equity fear to greed 100% ratio in the last month. I started using this “equity” put/call ratio about seven years ago, since the index futures seemed to be distorting the volatility of the overall CBOE put/call ratio. But there has never been a time in our data base, (8 years) with this type of fear generated so repetitively. This group of “investors” is traditionally the leaders of the lemmings. You can see this on this link: haysmarketfocus.com I don’t want to bore you, because I know that I have mentioned these unfolding trends many times in the last year, but look at just a brief compilation of the statistics from the latest week. Where appropriate I will also give you the link of our chart that shows the statistic. 1. 10-day Arms index above 1.50 for the 10th time in the last 16 months—ho! hum! haysmarketfocus.com 2. NYSE overbought/oversold level is at an extremely oversold level of -70.60. haysmarketfocus.com 3. NYSE net new highs at -358, well below the 784 net new lows of 9/21/01 haysmarketfocus.com 4. NASDAQ net new highs at -244, which is still lower than it was on 6/26/02 when the NASDAQ Composite was 1429.33 compared to Friday’s 1319.15. haysmarketfocus.com 5. NYSE McClellan oscillator is at a very oversold -210, and the 21-day at -10,234. Levels such as this typically are setting up a very robust recoil rally at the least. haysmarketfocus.com 6. The CBOE Volatility index closed at 43.45. As noted last week, in every case in the history of this indicator that it moved above 39.5, a major bottom occurred within just a few days, and usually the same day. haysmarketfocus.com 7. Before I leave the psychology indicators, let me mention the first hopeful sign from the Smart Money Indicator. This indicator was being ridiculed by the bears 11 months ago when it was screaming upward in the face of the September Terrorist attack panic. But when it rolled over in December of last year, they embraced it for all its worth. This index has not made a lower low under its 9/21/01 low, so I would interpret its intermediate to long-term message as still okay, but since it has been in downward trend since 12/01, the sideways action since mid-May, and the first higher high since December is encouraging that this recent plunge is being induced more by the emotional investor, and not being embraced by the rational investor. Take a look. haysmarketfocus.com 8. Okay, now let’s turn to the Monetary Indicators. They too are EXTREMELY powerful, and the 13-week growth rate of MZM has now turned back up sharply. In addition, there has been $742 billion added to Savings Accounts in last year (yes, that’s billions.) MZM is shown on this link: haysmarketfocus.com 9. Short and long-term Treasury bond yields are extremely strong. Yes, corporate bond yields are suffering from the same fear as equities, but what’s new? They always do. In many ways the quality yield spread is a great psychology indicator. haysmarketfocus.com haysmarketfocus.com 10. Now, for valuation. I have to just include this chart. As you can see, the S&P 500 index is now 32.4% undervalued. Yes, I know, there is huge speculation that every corporation in America is crooked and going to have to dramatically modify earnings downward. No-one knows the exact effect, but based on previous thought processes I have seen in these high-fear times, I would bet that the net effect is going to be much, much less than is now being bally-hooed by every lemming I see and hear. As I look at the P/E ratios of the different indices, I see the Value-Line Arithmetic index that is based on the past two quarterly reported earnings plus the next two estimated quarterly earnings is now at 17. The other indices that are based on the next 12-month estimated earnings are the S&P 500 at a P/E of 16.6, the DJIA at 16.2, the NYSE Composite at 13.5, the S&P mid-cap at 17.4, and the S&P small-cap at 18. For many decades one valuation technique widely accepted has been the rule of 18-22. It is not nearly as reliable as the IBES model shown in the graph above, but it is pretty good from a simplistic approach. It says that stocks are fairly valued when the inflation rate plus the P/E add up to be in the 18-22 range. With the latest core inflation rate, even for the C.P.I. which is not considered as accurate as the much lower GDP deflator, now measuring a 2.3% and declining rate of inflation, you can see that none of the above indices can be considered out of the fair value range. The arguments above are extremely powerful, but will the lemmings be able to accept them? I doubt it, after all I have been giving similar arguments for the market lows of March 2001, and September 2001, and for the last 6 weeks the psychological climate and valuation composites have been favorable. Well maybe the really bad news is the economy, RIGHT? Well let’s see. Worldcom, Enron, K-Mart have gone bankrupt, and they are not by themselves. Estimates are that in this year alone, bankruptcies will be close to $500 billion, an all-time world’s record. I would encourage you to read Brian Wesbury’s piece, one of the regular winner’s in the economic projecting game, that analyzes this problem. That is on this link: gkst.com Of course, it’s a problem, but in many ways the bankruptcies were needed to cure the excess, and will generate a new floor to build the next big phase of the economic growth upon. I think back to the projections many people were making concerning the Savings and Loan overwhelming debt, and find that the aftermath was not even close to those fears of the time. I don’t expect this one will be as well. But if you own bank stocks that just might be holding huge debt obligations for these failing credits the fear is intense. You never know do you? You are seeing visions that tell you to GET OUT NOW! There goes another family of lemmings that just know the market is bound to know something they don’t. How about the economy? It is no secret that the unemployment insurance claims set a lower low last week which was very positive, but then the Philadelphia Fed Survey came out showing a decline, and the lemmings panicked. They didn’t tell you that the decline came from the previous month that was close to a record high did they, and this month’s level is still very good? The Industrial Production numbers, probably the most reliable coincident indicator, was very good AGAIN. It revealed that the overall industrial production was up .8% for June, which relates to about a 6% year to date gain when annualized. That was good RIGHT, yeah, but not as good as the technology equipment, with its year-to-date growth annualizing at 27%. And oh yes, by the way, the book-to-bill ratio for the semi-conductor industry came in at 1.28, which is a 2-year high. I don’t want to overwhelm this report with graphs, but I can’t resist showing this graph that John Silvia’s outstanding economic team at Wachovia Securities included in this week’s commentary. You can easily see that high-tech is the driver for this Technology Revolution period, and all indications are that the massive distortions that occurred in the spring of 2000 have been corrected, and these companies are on the forefront of another growth period. I don’t want to forget the Leading Economic Indicators. They were flat this month which gave the double-dippers a crumb to gnaw on, but wait, another little clunker here that takes away that negative. While this month’s was unchanged mainly as a result of the stock market’s slide, they revised last month’s L.E.I. up from 0.4 to 0.6. And that is not the really best input to predict the future that comes from that release anyway. It has always been the ratio of the coincident to lagging indicator ratio that is the most accurate predictor of future economic growth. And that ratio is rallying strongly, so there! Inflation, wow!! Both the core and the overall Consumer Price Index were released this week and were at a very tepid +0.1%. When you look at the chart of this you will see inflation pressures are subsiding rapidly, with the year over year for the more important core rate at 2.3%, and the more timely last three month’s showing only a 1.9% rate. I want to get this out to you a little earlier this morning, so I’m going to wrap it up. But don’t forget that even with this devastation, the best index to measure the Technology Revolution (the SOX) is still up 83% since September 4, 1998. Yes, I know it is down 72% since its extravagant levels of March 10, 2000 when the lemmings were headed in the other direction, but the long-term up-trend is still very much intact. If I wanted to go back to its first days as an index that I have in my records, 12/31/93 I find this semi-conductor index is up a very strong 182% despite today’s panic. I know today’s panicking lemmings have selected the March 2000 period as their benchmark to measure the world by, but it is fairly interesting to go back to that period of 12/31/93 to judge whether stocks are a good long-term investment. Look at the results in the table below: Philadelphia Semi-conductor index +182% New York Financial Index +130% NASDAQ 100 Index +142% Investor’s Daily Mutual Fund Index +19% Dow Jones Industrial Average +113% Dow Jones Transportation Average +32% S&P 500 Index +81% S&P 100 Index +97% S&P mid-cap Index +134% Value-Line Arithmetic Index +117% It is interesting to see that the lowest percentage gainer of all these examples comes from that index that Investors Business Daily produces from the best momentum growth mutual funds. They are the leaders typically of the momentum lemmings that buy on strength and sell on weakness. So the long-term picture remains very intact. We forwarded all of you that receive our e-mail updates a great report from Dr. Rutledge on Friday afternoon. This report describes how sometimes you just have to hunker down and take the onslaught from the stampeding lemmings. It is not easy. I have losses much larger than I would have thought possible 11 months ago. They are not nearly as large as the S&P 500’s, and certainly not even in the same game as the plunging NASDAQ, but they are still painful. It is always the Value-oriented investors that stop a declining market. Dr. Rutledge’s report describes today’s valuation for each of the market’s sectors, and I think you will enjoy it. Is this really Armageddon? I don’t think so, and I’m willing to take a chance that the historic levels on all these indicators will be vindicated. They always have been in my little short 33 years professional experience. That doesn’t make it absolutely for sure, but it’s a pretty good bet in my opinion. I couldn’t be sorrier that I have been so bullish for the last 10 months, and that many of you are also suffering with me (and maybe because of me.) I’ve lived though the 1973-74 devastation, the 1980-82 period of extreme fear and frustration, the 1987 crash that looked EXACTLY like 1929’s black Monday, the 1990 Saddam Hussein deification in the lemming’s eyes, and even Greenspan and his occasional economic and market disturbing tirades for the last 15 years. I’ve suffered before, and sometimes my readers have suffered with me (and because of me.) But I think on balance that those readers have prospered mightily taking all the good times and the bad times together. I’m not sure whether today’s bruises are worse than those previous cases or not. Today’s bruises always seem more severe than yesterday’s. Today’s mistakes always seem more severe than yesterday’s. But if not the worst, I am sure it is one of them, and you are seeing history being made. Is this indeed the great collapse of America? " |
