The Tide Is Turning

I attended a Richard Russell tribute dinner in San Diego on Saturday. This function, in honor of the 84-year-old Russell’s 50 years as a newsletter writer, was attended by almost 500 people, including the likes of John Mauldin, Robert Precter, Ian McAvity, the Aden Sisters, Ivan Boesky, Bill Bonner, Bert Dohmen and a host of others.

There was a brief question and answer period. One visitor asked him what he would do if he was running the country. In classic Russell fashion, the venerable analyst answered, “I’d do nothing. I’d let it happen. I’d let the bear market do its work.”

For the rest, Aaron Task of Yahoo Finance Tech Ticker pulled me aside for a short video interview, and the paragraphs below are from his report.

“There was a general sense of optimism this weekend in San Diego [PduP: In no small way influenced by the fact that the market had seen four straight weeks of gains], where I attended a hedge fund conference and separate tribute dinner for newsletter legend Richard Russell.

“Among those in attendance - and feeling at least cautiously optimistic - was Prieur du Plessis, noted blogger [PduP: Thanks Aaron!] and executive chairman of Plexus Asset Management, a South African-based firm with about $2 billion of assets.

“The market’s message is ‘the tide is turning’, says Du Plessis, who cited the same valuation argument as BCA’s Martin Barnes as well as these recent trends:

• Outperformance of small-caps stocks over large.
• Strength in growth-oriented sectors like tech, basic materials and consumer discretionary.
• Strength in T.I.P.S., commodities and emerging-market stocks.
• The traditional carry trade currencies such as the US dollar and Japanese yen losing steam.

“These are the kinds of signs ‘one would typically expect at a bottom’, says Du Plessis. Even if the recent rally - over 20% for the Dow and S&P in the past four weeks - is a case of ‘too much too fast’, the money manager believes the S&P has established a new trading range between the March lows (666) and January highs (935).

“While the global economy remains ‘murky’ and America’s banks the ‘big elephant in the room’, Du Plessis believes a ‘bottoming area’ has been established. [PduP: More accurately, the charts have the look of base formation development.] He expects emerging markets, notably China and resource-rich nations like Brazil, will continue their recent outperformance.

“On any near-term pullbacks, Du Plessis recommends investors play the ‘reflation’ trade via ETFs, including:

• China: iShares FTSE/Xinhua China 25 Index (FXI)
• Brazil: iShares MSCI Brazil Index (EWZ)
• India: iPath MSCI India Total Return Index ETN (IPN)
• Materials: iShares S&P Global Mat. Sector (MXI)
• Gold: SPDR Gold Trust (GLD) and Market Vectors Gold Miners (GDX)
• T.I.P.S.: iShares Barclays TIPS Bond Fund (TIP)

“‘I suspect this is a trade that will be perpetuated over the next few years,’ he says.”

Comments

[sheople:]

Good dog and pony show. We'll see how long you can keep it up, Federal Reserve. Jobs are the meat and potoatoes and you've sent them overseas.

Apr 10 08:48 AM

[Lilguy:]

I think that, over the last month, there has been a disconnect between the markets and our national and global economic reality. I suspect that earnings reports--even those from WFC & other banks--will put some reality back into the market. My fear is that the "guidance" from these companies will be filled with more rosy projections that let's overly optimistic investors sustain the bear market bull.

I suspect we are near the market bottom (somewhere in the 600s for the S&P500), but I do not see the economy--and ultimately the market--to pick up anytime soon thereafter. There have been too many dislocations in the consumer and financial sector to expect a sharp, sustained turnaround in stocks.

In fact, Doug Short at dshort.com shows that the "four bad bears" (including the current one) have had a history of going on for a decade or more. My pedestrian advice: Do rush into the market anytime soon unless you are equally prepared to rush out of it. It will be a traders market.

Apr 10 09:17 AM

[E Nuff Sed:]

You can't spend your life looking in the rear view mirror. The banking system has stabilized and life is coming back into the economy. Earnings and employment are lagging indicators. By the time they come back the major rallies will be over and it will be time to start selling again.

I suspect history would say that we were idiots if we bought and held stocks in the 2005 - mid 2008 period when stocks were expensive. We will look like bigger idiots if we do not buy now when stocks are cheap. I think you will have to wait and long long time to find stocks like PG in the 40's and JNJ in the low 50's. You are getting a Mercedes for the price of a Kia.

Apr 10 10:12 AM

[_richard_:]

It's worth pointing out that, after the crash and deflation of 1928 and 1929, the stock market had a powerful surge in the early thirties--only to plummet to its lowest levels over the next decade.

There's a term for this: dead cat bounce. Because when it falls from a great height, even a dead cat will bounce.

Apr 10 10:42 AM

[realold:]

So, this was in honor of all the advisors of buy and hold? These guys are getting awards for predicting or even assisting this crash?

Apr 10 03:10 PM

[drbob66:]

????


On Apr 10 04:03 AM 367851 wrote:

> Stick your bacon and eggs up your ass America I'm not eating that
> crap anymore, it's bad for you.

Apr 10 07:25 PM

[prudentinve...:]

You are right. P&G looked good in the mid-40's and JNJ looked good in the high-40's. I had owned both for many years but had gotten out of both in 2007, when I thought them too overvalued. I bought both a few weeks ago, when I considered them reasonable.
Regarding PG's cousin CL, I also got out in 2007, and it has remained too expensive for my way of thinking, even in the recent rout.

To carry on with your analogy, in February and early March you could "buy a Mercedes for its fair price", whereas in 2006-2007 you were buying a Mercedes C-class for the price of an S-class.

Good luck with your investments.


On Apr 10 10:12 AM E Nuff Sed wrote:

> You can't spend your life looking in the rear view mirror. The banking
> system has stabilized and life is coming back into the economy. Earnings
> and employment are lagging indicators. By the time they come back
> the major rallies will be over and it will be time to start selling
> again.
>
> I suspect history would say that we were idiots if we bought and
> held stocks in the 2005 - mid 2008 period when stocks were expensive.
> We will look like bigger idiots if we do not buy now when stocks
> are cheap. I think you will have to wait and long long time to find
> stocks like PG in the 40's and JNJ in the low 50's. You are getting
> a Mercedes for the price of a Kia.

Apr 11 07:34 AM

[D. McHattie:]

“These are the kinds of signs ‘one would typically expect at a bottom’, says Du Plessis."

They are also the kinds of signs one would typically expect at a false bottom.

What do the fundamentals tell us?

Apr 11 10:20 AM

[Brian Dightman:]

You can try and nail bottoms with technicals and fundimtals, but neitheir will work consistently over time but they can help with your investment process. Remember, fundimentals are subject to manipulation and many technicals are subjective and rapidly changing.

The real key in this market, I believe, is what is your strategy. If you are a blind bull with a sloppy approach you may find yourself very dissappointed. If you are a naysayer unable to find reason to participate, you may wake up one morning to a market that is well past these levels and not to return for a very long time, if ever.

Apr 11 12:18 PM

[mkreisel:]

Market rallied on ever declining volume for 5 straight weeks - technically speaking very bearish - and people are already thinking the tide has turned?

If things look so great, why the hell does Goldman Sachs, the strongest of all banks, need to issue new shares (supposedly to pay back TARP)?

Apr 11 04:10 PM

[The Good Ne...:]

Great interview Prieur,

Russell is alway so grumpy -- even in the face of an obviously improving optimistic sentiment...

This is no doubt just the first leg of the bull rally of 2009. I've been following the daily Rasmussen Consumer/Investor confidence indexes closely in the past 6 weeks. They both continue to surge higher with no bearish movement since both rocketed higher 3-4 weeks ago...

mast-economy.blogspot....

If they falter, then the rally will too.... but if they keep moving higher, I can't see any significant dips on the near term horizon...

Strong earnings from the elephants in the room this season and positive stress tests will add fuel to the rising optimism...

@_richard_,

This rally has absolutely no characteristics like a dead cat. If there is any kitten to be found right now it is attached to a bull horn.

@mkreisel,

Check the technicals on the last 12 bears as the new bull rise begins... as volume increases with confidence over time the slope higher just increases...

Good luck.

GNE
goodnewseconomist.com

Apr 12 04:05 PM