Equities: Where Are the Bears?

After one of the biggest equity market declines we’ve seen in recent memory and a looming worldwide recession, investors should be worried and bearish, right?

It seems not. Maybe this all stems from Warren Buffett's clarion call to buy US equities last week. Readings from sentiment models indicate that either investors are not bearish enough or plain outright bullish on the market, which makes me concerned that there is more downside to come.

AAII survey not bearish enough
The chart below shows the AAII sentiment survey. After the recent free-fall in the stock market, it is amazing to me that sentiment readings are less bearish than they were during the last short term market bottom:

(click to enlarge)

Hulbert indicators confirm lack of bearishness
We also have several confirmations of this lack of bearishness. Mark Hulbert recently wrote that the newsletter writers who advise buy-and-hold strategies haven’t thrown in the towel yet and moved to market timing:

Historically, buy-and-hold tends to reach its peak of popularity at market tops, just as market timing becomes most out of favor. The inverse tends to be the case at market bottoms.

On Thursday October 16, Peter Brimelow also confirmed that newsletter writers’ sentiment wasn’t bearish enough: 

The Hulbert Stock Newsletter Sentiment Index, which reflects the average recommended stock-market exposure among a subset of short-term stock market-timing newsletters tracked by the Hulbert Financial Digest, stood on Wednesday night at negative 12.8%. That's sharply higher than last week, when it was at negative 33.5%, although the Dow was 1,400 points higher and Mark Hulbert was already worried for contrary opinion reasons.

Bloggers are wildly bullish, individuals not panicked
What’s more, I was shocked to learn that there isn’t a single bear in the recent TickerSense’s blogger sentiment survey.

My own private conversations with individual investment advisors indicate that their clients are not panicked and some have even been buying. While these advisors mostly advocate asset allocation and buy-and-hold strategies, the lack of panic among individual investors is a huge concern for bulls.

On the other hand, there is a pervasive sense of doom on the economic front. The lack of doom among equity investors, however, points to more downside for the stock market.

Comments

[investor88:]

In case we think this is the bottom [implied by Warren's clarion call to BUY US equities], Cam Hui's article is a much needed wake up call. Other than short term trading, we still have to preserve capital [cash] although Warrren Buffet has said in effect "cash is trash".

2008 Oct 20 07:17 AM

[fatcat:]

Go to Marketwatch blog...almost all bears there..at least 90%...

2008 Oct 20 07:19 AM

[j_remington:]

Buffet gets paid a 10% dividend to buy and hold. Do you? He is merely trying to influence the market in order to reduce his mark to market losses in long term Index PUT options. Or perhaps he is also writing more short term puts.

2008 Oct 20 07:58 AM

[moorer1:]

Is the $57 billion in outflows from equity funds (Oct 1 - Oct 15) bearish?!

trimtabs.com/site/fund...

2008 Oct 20 08:49 AM

[Jerlad:]

I agree. When you look at the DJIA chart after Buffett's famous October 1974 Forbes interview, it jumped and then corrected. You had one more chance TWO MONTHS LATER to catch the bottom before it took off. Also, Goldman Sachs (GS) jumped after Buffett's recent move was publicized and then corrected dramatically after a couple weeks.

The Buffett Bottom? Maybe but I would not bet the farm - just yet. At least wait for a better entry point.

DISCLOSURE: I am long QQQQ at 30.

2008 Oct 20 09:13 AM

[inthemoney:]

If we get anymore bearish, one will be able to pick up stocks for free, the same with oil.
VIX is at 80. It means smart money is very bearish. Retailer investors pulled record amounts of money out of funds.
I think we dropped too far too fast. It is hard to be bearish at this level unless you are expecting a complete meltdown. What are chances of that? We are down more than 40% after all. Half of it in just 2 weeks. It is a suicide to go short at this point.
It is the same as with oil. First everybody was saying oil will go to $200. Now they are saying it will go down to $40-50. Where were all these people just 2 months ago? The truth is, they go no clue what is going on.

2008 Oct 20 09:55 AM

[John Lounsbury:]

Two comments:

1. I agree that we may not have seen the actual bottom of this primary bear market. However, I expect that bottom is near. It could well be that we will see a new primary bull market within the next six months or so. (A primary bull market is confirmed if the DJIA closes up at least 20% from the low, currently 8451.19, or at or above 10,141.) If that happens, the further progress of the market will depend on whether the bottom of the recession has past or can be anticipated. We could go right back down if the outlook is not good.

2. I am a participant in the AAII sentiment survey. The sentiment response is based on "where do you expect the market to be in six months?". When the Dow went below 10,000, I changed my input from bearish to bullish. With my current assessment of likely scenarios, I will stay bullish as long as the Dow stays below 10,000. Above 10,000 at this point I would change to either neutral or bearish. Too many people tend to look at too close a horizon when interpretting the sentiment information when it has a six month or longer outlook.

2008 Oct 20 09:57 AM

[John Lounsbury:]

iInthemoney, good comments. By the way, it is possible that both of the extreme predictions you have cited (oil at or below $50 and at or above $200) may both occur within the next 2-3 years. As with many predictions, it is not the actual $ amount but the timing that is most important.

2008 Oct 20 10:03 AM

[Evan Grey Owl:]

inthemoney remarked, "I think we dropped too far too fast. It is hard to be bearish at this level unless you are expecting a complete meltdown. What are chances of that? We are down more than 40% after all. Half of it in just 2 weeks. It is a suicide to go short at this point."

Questions: Is there some advantage for investment banks participating in the bailout if their equities values are severely depressed? Is this somehow helpful to banks facing bankruptcy, to have only devalued assets? Some tax advantages for those selling large blocks now --before a potential change in administration? Because there is more going on than meets the eye.....

2008 Oct 20 10:15 AM

[robert.b.fe...:]

Good observation we will probably test the current low again within eight to ten weeks before a sustained rally can get underway. Keep in mind that regional factors are more significant during this cycle than in past ones. Small investors are getting bullish but they are looking to avoid sectors which still show down side risk like retailers and REITs. I still see a lot of bargains out there like Intel (INTC) but I would still be avoiding Star Bucks (SBUX). Buffet has been in cash for a long time and now he's spending like a drunken sailor and not just in domestics he bought a sizable chunk of (ALTI). So do your due dilligence and be finicky when you buy. See you in a few weeks at the next dip.

2008 Oct 20 03:42 PM

[Old Trader:]

If one is looking for "bears", just check out the comments on the Calculated Risk" blog, LOL. Fwiw, I'm with the camp that says this is just a bounce, and am looking for some more pain ahead, based on a crappy economy.

It seems we're confronted with 2 simultaneous, but different problems. One, the credit markets, is being addressed by global injections of liquidity, which seems to be working, albeit slowly. The second is a global recesssion, which can only be mitigated, somewhat, via the liquidity injections.

2008 Oct 20 11:28 PM