Weekly Street Sentiment: World Might Not End This Week

It's an interesting week for sentiment and one that some might optimistically think may foretell brighter days ahead.

After months of the sell-side demonstrating little variance in its overall bearish sentiment towards the market and then recent weeks of walking up to, teetering upon and considering a leap into the abyss, now it appears that the sell-side has retreated gingerly from the edge to decide that the world isn’t going to end…at least in the short term.

Three bullish shifts in short-term industry sentiment, in addition to two industries making the small but encouraging move from bearish sentiment to neutral, indicate a sell-side that is thinking February is likely to be better than this past January, at the very least. As we all know by now, January was the worst ever start of a new year for the broader markets.

We admit surprise at the depth of that well of optimism from which the sell-side seems to be drawing. However, we are equally not surprised at all by how January ended up based on what the sell-side was saying to their buy-side clients back at the start of the month.

We reported, after market close on January 9, when the year-to-date returns were still basically flat as opposed to down almost 9%, the following:

At the very least, (the institutional sell-side) seem to be telling the buy-side bulls, who were getting ready to declare a bottom and a rally after the first few days of the new year, to hold back on the victory dance.

Boy, that turned out to be accurate and the understatement of the month!

However, if that was then, clearly this is now. And now the indicators suggest that a rally might be in store, at least for the start of February. This is the first week of 2009 that has more positive indicators than negative. Areas like Technology and Basic Materials are both being suggested as places that the buy-side should continue or, in most cases, commence the allocation of capital.

In fact, with the exception of Energy and a continuing decline in the sentiment towards Industrials, albeit slower than the last two weeks, the sell-side seems almost giddy in its shorter-term attitude towards the market relative to prior weeks.

As we’ve said in past updates, the sell-side ability, as an aggregate group of hundreds of firms sending thousands of ideas to their buy-side clients, has had an uncanny ability to call inflection points in the market that lead to substantive multi-week, multi-month and even multi-quarter trends. It might be too much to hope that this week represents the start of the end of this bear market. But, at the very least, it bodes well for the week ahead.

Comments

[upgrayed:]

This is the type of useful info that I wish sa would carry more of.

Feb 02 08:27 AM

[know nothing:]

Think Again! Never has there been such desperation for a stock market rally.. There will be new lows put in soon, possibly this week! We are still in a bear market. That won't change because of one rally. More revisions are still ahead, they try to take panic out of the market through lies,and then revisions... Obamas plan is a rip off.. People act like he is the anti-Christ! He's not that powerful...He is one of the best conmen in the game, tell them what they want to hear and they will follow you straight to hell, and like it. Most everyone has blinders on for some reason? It's hard to believe that the only place for people to invest is the stock market! Wake up.. We have years to wait before the next new bull market. This 20% rally everyone is waiting for is a joke! Just what has changed to make people think this is even comming in the first place? Maybe someone on cnbc, promised a 20% rally? They have been calling a bottom for months, now, Oh thats right it must be in,because we haven't made new lows for awhile.. Until unemployment bottoms and housing prices bottom, and the banking problems are figured out, there will be no new bull market. The Obama plan is such reckless use of the tax payers dollars, it won't stimulate anything. Only run our debt up for tax payers to pay in the future. It seems that most everyone is oblivious to this factoid. People are so buisy cheering Obama on that they are not watching the game! I guess everyone needs something to believe in?

Feb 02 09:00 AM

[Alicia_Finance:]

Thanks for the information, I found it very useful.

Feb 02 03:05 PM

[henarl:]

What know nothing said !

Feb 02 03:35 PM

[derryl:]

I'm happy to hear sentiment might be improving. We have to realize that 'fundamentals' themselves are based on investor sentiment. If the 'concensus sentiment' is that a P/E of 15 is 'good' then the market can stabilize at around that level. If sentiment is more pessimistic then a P/E of 8 might look 'good' and the market can settle down there for awhile. There is no permanent 'objective' ratio of P to E that says 8 is 'really' right or 15 is really right. Fundamentals are a movable feast (with apologies to Hemingway).

Unemployment only indirectly affects investor fundamentals because the bulk of 'investment' money is not owned or allocated by the people who are becoming unemployed. Unemployed people will consume less which lowers the E in P/E, but these are not the people who own or control all the 'investment' money that needs to earn a return.

For example, pension funds' financial models are based on 'historical' ROIs in stocks and other large scale long term investments. These funds cannot payout their obligations earning 3% on bank CDs, and if they tried this, those banks would have to put the money into stocks in order to even pay the 3%. Banks have to make money to pay interest, and there are only so many kinds of places to invest money that offers the prospect of a decent long term return. If the stock market represents 'the economy', then investing in stocks may be the only realistic option for large scale investments like these.

Government bond yields are paid by taxing some people to pay interest to other people, so pensions funded with bonds are actually directly tax-funded. We may end up doing this anyway, but at least so far pension funds are expected to earn their own returns in the private market. Same with insurance funds.

If the global economy is capable of 'decoupling' from the US, there are no signs of it. What we see so far just seems to prove exactly how coupled everyone is to everyone else. MAYBE emerging markets will be able to pay better returns than US markets, but it's a big maybe. Sometimes when the leader quits the other players quit too. Sometimes the leader has to suck it up and get back to work.

As long as G20 central bankers continue supporting the $US as the world's 'gold' or reserve currency, there can be no meaningful decoupling. And any uncoordinated or 'spontaneous' move to go off the dollar would be catastrophic to the supply-chained global economy. If there's going to be decoupling I'm pretty sure we'll be warned of it well in advance by the people who will be engineering any new global monetary system.

On the other hand the thing might go totally out of everybody's control and collapse, in which case it doesn't much matter where your wealth is stashed because either the government or the mob will take it from you anyway. So short of preparing for collapse, I think it's a good thing that investors are starting to recover some faith in the economy. It's already Monday afternoon and the world hasn't ended this week. So far so good.

Maybe I'm being fatalistic but I think money has to come back into stocks because, really, what else is there?

Feb 02 05:17 PM