TheSkyIsFalling!!TheSkyIsFalling!!
U.S. Stocks May Rebound as Bearishness, Selling Hit Extreme
June 12 (Bloomberg) -- Investor surveys show U.S. equity investors are their most bearish in almost two years. That traditionally means it's time to buy.
Stocks reached six-month lows last week, and selling by individuals reached the highest level since the run-up to the Iraq war in March 2003, according to one measure. These kinds of readings historically point to a market bottom by suggesting those who want to sell have already done so.
``When these indicators get exceedingly negative, it generally represents good buying opportunities,'' said Paul Hickey, an analyst at Birinyi Associates Inc., a research and money management firm that oversees $300 million in Westport, Connecticut. ``Once they've sold so much, they don't have much left to sell, so what else can they do? They buy.''
Companies including Tyco International Ltd. the world's biggest seller of fire and security systems, are already lining up to buy. During the retreat, they purchased the largest amount of their own stock since November.
Last week was the worst for stocks since April 2005, as prices sank on concern that the Federal Reserve will slow the economy as it raises interest rates to fight inflation.
The Standard & Poor's 500 Index retreated 2.8 percent to 1252.30, bringing its decline from five-year highs in the last month to 5.5 percent. The Dow Jones Industrial Average fell 3.2 percent to 10,891.92. The Nasdaq Composite Index dropped 3.8 percent to 2135.06.
Inflation readings this week may help determine whether the market indicators are accurate. Reports on wholesale prices will be released tomorrow and consumer prices the following day. A private measure of consumer confidence is due on June 16.
`Odd Lot' Sales
Earnings reports from securities firms Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., as well as electronics retailer Best Buy Co., are due this week. The results may show whether corporate profits can withstand rising borrowing costs.
Bullishness among financial newsletter writers is the lowest since August 2004, according to a survey by Investors Intelligence. Optimism fell to 40.2 percent in the week ended June 3, the third straight decline, from 42.6 percent.
The reading was as high as 53.2 percent eight weeks ago and touched a 12-month high of 60.4 percent in the period ended Dec. 23, according to the New Rochelle, New York-based research firm.
Birinyi's research shows net selling of so-called odd lots on the New York Stock Exchange averaged $1.96 million a day in the past 50 days. The figure is the highest since March 2003, when the S&P 500 last fell 10 percent or more. Trading in odd lots -- batches of less than 100 shares, most likely bought and sold by individuals -- suggests smaller investors have been scared out of the market.
`The House Buys'
Both measures have approached one-year lows at the same time in only seven previous cases since 1970, Birinyi's Hickey found. The S&P 500 rebounded in each instance, averaging a gain of 3.9 percent in the next month and 6.3 percent over the next three months.
History suggests buying and selling by individuals peaks when stocks are about to turn, said Charles Biderman, president of TrimTabs Investment Research in Santa Rosa, California. On the other hand, he said, company activity tends to track the market's direction.
``What we're seeing -- typical at a market bottom -- is individuals bail and the house buys,'' said Biderman.
Individuals sold $5 billion in U.S. equity funds last month as companies bought $50 billion of their own shares, according to research from TrimTabs, which specializes in analyzing fund flows. U.S. companies announced repurchases of $244 billion in May, data compiled by Bloomberg shows.
Earlier Turnaround
Tyco, based in Pembroke, Bermuda, announced a $2 billion stock-buyback program on May 4. Tribune Co., the second-largest U.S. newspaper publisher, said at the end of the month that it will spend $2 billion to buy back a quarter of its shares.
TrimTabs data shows that in the first four months of 2000, $110 billion went into U.S. equity funds and companies were net sellers of more than $100 billion of shares. The S&P 500 closed at an all-time high of March 24 of that year, and lost half its value in the next two years.
Not all analysts see a rebound. Christopher Johnson, director of quantitative analysis at Schaeffer's Investment Research in Cincinnati, cautioned that some indicators haven't gotten extreme enough.
Johnson looks at the ratio of put options to call options on the Chicago Board Options Exchange. An option is a contract that provides the right -- but not the obligation -- to buy or sell a security at a set price within a set period.
`Shaken Out'
Put options are the right to sell a security at a certain price, a form of insurance against a decline. When the number of puts increase relative to the number of calls, which give the right to buy, investors may be bracing for a selloff.
The ratio of puts to calls approached 0.9 on June 2. Readings of 1 or more would be extreme enough to create a buy signal, according to Johnson, who noted that buyers of options tend to be institutional investors.
``We've just not seen investors turn and run, which tells you that all the sellers haven't been shaken out of the market, and until they're shaken out, it's worth being cautious at best,'' he said.
Giles Knight, who helps manage $81 billion at Gartmore Global Investments in West Conshohocken, Pennsylvania, bought shares of Boeing Co. and Charles Schwab Corp. as the market fell. Economic growth won't slow as much as those who are selling expect, he said.
``I've got to believe we're close to some kind of a bottom,'' he said. ``The economy is still going to be OK.''
To contact the reporter on this story:
Dune Lawrence in New York at dlawrence6@bloomberg.net
Last Updated: June 12, 2006 00:11 EDT |
