A couple of weeks back, I wrote a post summarizing what the experts were saying on the bull vs. bear market debate. (This article is also taken from my blog.)The S&P500 just broke out of resistance at 875, and the yields on the 10 year look to be rising straight to 3.7-3.8%. Here's what the gurus have been saying these past few days:
- Mark Hulbert: That bullish bandwagon. Commentary: Some sentiment measures showing too much optimism
"Bear-market rally? Or major new bull market? One of the distinguishing characteristics of the former is an excessive eagerness to jump on the bullish bandwagon. At the beginnings of the latter, in contrast, advisers are more reticent -- turning bullish more slowly and begrudgingly.
"It is worrisome that two out of four sentiment measures I analyzed are showing increases in bullish sentiment since the March 9 low that are markedly higher than the typical experience at the beginnings of prior bull markets."
"The bottom line? It is difficult, but not impossible, to argue that we are in a new bull market. It is more likely that we're in a bear-market rally."
- Art Cashin: "This rally is still somewhat suspect. I was looking for a little bit of a correction. This one looks like a rolling top is developing, kinda umbrella canopy. Tough time closing above 875. it would be perfect to pull back to 750 – 780, hold there and rally again. You don’t have to go back to retest that low.
I'm also a little concerned about the volume recently, going down as the market's been going up. In the 'Old Trader's Handbook,' it says rallies in bear markets die on low volume. We may be rounding that top right about now."
On his pullback prediction of a fortnight ago: "If you look at both the S&P and Dow, they're forming a sort of canopy top. We're within days of finding out...whether we're topping and rolling over."
- Albert Edwards : "Despite one of the biggest economics and profit collapses in history, US stocks have failed to get cheap in the same way that they have in Europe or Japan. My concern is that the US equity bear market has not yet fully played out.
"The current pop in the market is not dissimilar to the many bear market rallies between 1929-1933, where signs of economic stabilisation were met with 25% plus rallies... This optimism was subsequently crushed."
A reversal will cause a "catastrophic loss of confidence" -- to date it has only been dented by poor news, not wrecked by it.
I suspect these swings tell us more about market psychology rather than valuation. There are two distinct investment constituencies: value investors and hard-core bears, which have been pulling indexes in both directions.
- Charles Allmon has been saying for some time that a great buying opportunity is approaching, his current stock surge is strictly to catch what he sees as a bear-market rally. He still thinks the stock market could decline to 3,200-4,200 on the Dow by 2011-2012 -- and that it could cross the price of gold.
But he's impressed with the strength of the March rally, and thinks it could reach Dow 9,000-10,000. However, he warns that a 10% retrenchment will cause him to bail out quickly.
- Jim Bianco: "I don't think we are getting out of this for a long while. This has been a lousy stock rally.
"We believe these are classic signs of a speculative rally. Too many people were buying 'lottery tickets' such as Citibank at 99 cents and are now enjoying big gains. This has frustrated those that try to separate good from bad.
"We've done this twice in the last six months -- huge rally of 20-plus percent in stocks -- only to give it back to have a new low in the markets."
- Bob Doll: "Almost a 30% move in less than 2 months so a rest somewhere along the way at best by going sideways. We think the market has turned the corner as the economy has gone from really bad news to the less bad news and that’s all that the market needs after a 60% decline. Do not think we’ll test new lows. It’s is possible we could go back to the 750-800 zone. I don’t think we’ll see 666 on this round. Believing in fact that the worst of the recession is in the rear view mirror. We’ve probably seen the lows.
"The fact that the market is going higher in the face of the swine flu news shows that the market wants to go higher."
- David Tice, of the Federated Prudent Bear: "A lot of companies beat estimates by cost cutting measures. We believe this market is going to go a lot lower. This has been a heck of a bear market rally. Market will take out the 666 low. Economy is still in very very bad shape. Volcker said that economy has been functioning only due to the grace of government intervention. Market hasn’t priced in economic carnage when it is currently at 22 times forecasted 2009 earnings.
"We haven’t had capitulation. Recession is getting worse. Risk of the lack of confidence in UST. We still have stocks trading at 1.7 times book value. This market’s not going to bottom till it gets to below book value, 6- 10 times earnings. We have all the evidence in the world that because the market’s decline one year doesn’t give us the right to rally again."
- Stephanie Giroux, chief investment strategist at the brokerage TD Ameritrade: "I think the market rally that we're seeing is a little bit of false euphoria. When the market starts to digest that the less bad isn't going to be enough, you'll see it maybe take a breather for a while."
- Richard Russell: "On the bear market decline, we never saw the great values that usually appear at major bear market bottoms. The ‘great value’ area is the place where I would normally suggest that investors load up with blue-chip stocks. For this reason, I would prefer waiting out this rally or making a limited trade with DIAs [Dow Diamonds ETF] with stops. I continue to believe this is an upward correction in an ongoing primary bear market. I note that many observers are saying that ‘this is a market that won’t go down’. Believe me, all markets go up - and all markets go down.
"The Lowry’s statistics do not favor the argument that a new bull market has started. Normally, based on the long history of the Lowry’s studies, when a new bull markets starts, their Buying Power and Selling Pressure Indices move apart by roughly the same number of points.
"The fact - since the March 9 low, Lowry’s Buying Power Index has gained 57 points, but their Selling Pressure Index has only dropped 20 points. This is at sharp variance with all other bull market starts in the Lowry’s history.
"Basically, when a new bull market starts, the background is that the urge to sell has been exhausted. The pressure to press that market down further has disappeared. Thus, the market is left in the hands of those who wish to buy. In the current case, there is still a potential supply of stocks to be sold. In other words, the situation is not correct for the start of a new bull market, based on 76 years of the Lowry’s data.”
- Michael Santoli: "This surge has been better, and more substantial, than a mere bounce. It has indeed been accompanied by plenty of less-than-terrible economic news. The rally has also out gained the initial phase of the 1938 rally I and others have cited repeatedly, due to its similarities with the 2008-2009 experience. If there remains relevance in the '38 analogy -- a powerful rally off historically depressed levels with the world still a mess -- then we should be in for a sideways-to-down phase at minimum here.
"There remains skepticism toward the upside fun, especially among professional investors who haven't owned enough of what has led this move, have little company-level conviction in the fundamentals and seem to want a chance to buy them lower. This is a net positive.
"At the same time, retail-tinged, somewhat frothy activity is percolating. This happens both in market head fakes and early in durable up trends, but it bears watching. Discount-broker volumes have climbed smartly in recent weeks while overall volumes have lagged, partly a benign result of reduced activity from recently bruised long-short quantitative funds.
"The much remarked leadership of low-quality, low-priced stocks (a normal aspect of rallies from depressed levels) typically fades within a few months even in strong up markets."
- Colin Robertson, global head of asset allocation at Hewitt Associates: "Enormous amounts of money have been and need to be raised, and that will be a constraint on the markets for some time. There is a huge amount of supply in both the equities and debt markets, and it is even greater in debt.” even the much talked about 'wall of money' would not have the impact that some expect. There is a lot of money on the sidelines, but it is mostly trading money for the short term."
- Tim Bond, head of asset allocation at Barclays Capital, said earlier this year that the ageing of Western populations means that there is less buying power. “The number of savers peaked in Japan in 1990 and in 2000 in the west.”
"It is not that consumption has bounced back in a strong way; rather, production has fallen off a cliff, so inventories are now very, very low relative to spending. Businesses have over-estimated the weakness in final demand", according to Tim Bond of Barclays Capital, and the gap has not been this extreme since the bottom of the 1974 economic recession -- which coincided with a substantial rebound in the U. S. stock market.
- Stephanie Pomboy: "At the end of the day, earnings, to state the obvious, are what makes the stock market go up -- and down. The prospect that they are in for a fresh drubbing is all the more ominous because it's unexpected. bear-market rallies come and go, but what makes this one so noteworthy is just how far removed perception is from reality."
- Jeff Saut: "To be sure, we recommended buying the panic nine weeks ago today. At that time we had an “edge” with our proprietary oversold indicator more oversold than it was at the 1974 generational ‘low” of 577 on the D-J Industrial Average (DJIA). Moreover, the then “selling stampede” was pretty long of tooth at session 19, which had lopped-off nearly 30% of the S&P 500’s value from its February 9th high. Now, however, 39 sessions into a “buying Stampede” we have no “edge.” Indeed, just like when too many participants bet on the same horse the betting odds on that horse go down, the “betting odds” of making money in the short-run have been greatly reduced after eight weeks into this upside skein. Consequently, the trading account is back in a cash position and we are even hedging some of our investment positions for a downside correction.
"That said, we continue to believe the bear-market “lows” are behind us; and that the worst of the recession is in the rear view mirror (except for employment numbers).
"The call for this week: The longest “buying stampede” chronicled in my notes is 41 sessions. Today is either session 39, if you measure from the intraday low of March 6th (666 basis the S&P 500), or session 38 if you measure from the March 9th closing low of 676.53. In either event, we have made a lot of money over the last eight weeks and continue to think the trick from here will be to keep that money. Longer-term, we are pretty optimistic. Near-term, we are cautious. If I had to buy something today it would be the emerging markets like Brazil since most of the emerging markets didn’t make new reaction lows in March like the S&P did. Moreover, I think they will be the leaders in the next bull market."
- John Hussman: "The S&P 500 has now corrected about one-quarter of its prior losses. Bear market corrections of about one-third are not unusual, but I wouldn't bank on that. Having failed to do anything effective to mitigate the second wave of foreclosures that is set to begin later this year, and seeing very little sponsorship in trading volume (despite good breadth), my impression is that we most likely are in a strong correcting rally in the context of an ongoing bear market. At the same time, cash-equivalents are yielding next to nothing, so it's unclear to what extent investors will decide that stocks are their only real alternative, which might allow a continuation of this advance.
"On normalized profit margins, valuations are above the historical average, and prospective long-term returns are below the historical average. Overall, I expect the probable total return on the S&P 500 over the coming decade to be about 8% annually, provided we don't observe much additional deleveraging in the economy. At the 1974 and 1982 lows, based on our standard methodology, the S&P 500 was priced to deliver 10-year total returns of about 15% annually. While it has become quite popular to talk about 1974 and 1982, the stock market is presently not even close to those levels of valuation.
"Meanwhile, market action in recent weeks has been excellent from the standpoint of breadth (advances versus declines), uneven from the standpoint of leadership (where much of the strength has been focused on speculation in companies with extraordinarily poor balance sheets), and rather uninspiring on the basis of trading volume."
- Duncan Weldon from Senhouse Capital: "This is a relief rally. There's a bit more risk appetite coming back, although this rally is starting to feel a bit overdone. In February it looked for a while that the world was ending. People saw that decline in world GDP for 6 months and extrapolated it to forever and were thinking S&P will be at zero by Christmas time. People have reassessed and we've seen a bit more risk appetite coming back.
"This rally is starting to feel a bit overdone. When you look at the indices they are starting to roll over slightly. The rate of ascend is not that quick it was a few weeks ago. It also started off with a lot of short covering and there’s been a sector rotation from the defensive into the cyclicals. Well I think the people might be getting ahead of themselves. Second derivative argument: time to buy is when the rate of growth slows. That argument makes a lot of sense in a normal recession when you are looking at a 2-3 % decline of GDP. When you are looking at a 5-6-7% decline.. it may be a little too early to buy."
- David Fuller (Fullermoney): “Base formations, confirming not only the ending of a bear market but the beginning of a new bull market, come in all shapes and sizes. The leading stock markets, which generally have better fundamentals, usually form smaller bases before commencing their uptrends, as we have seen with China and a number of other emerging markets from Asia to South America. Fundamentally weaker markets, such as the US and most of Europe, require a longer convalescence before a significant recovery occurs. This explains the new lows in late February and early March. This impressive rally is overextended in the short term, so we can expect it to spill over into a reaction and consolidation before long. The recent uptrend consistency will be followed by some choppy action as legitimate fundamental concerns remain.
"At Fullermoney, we maintain that the S&P 500 Index will most likely hold above its March low, as it continues to develop a base formation. The main reason, previously stated, is that we are witnessing the greatest attempt at asset reflation in human history. In comparison, it makes Greenspan look, well … almost Austrian and the USA is certainly not the only country engaged in a record reflation. The secondary reason is the record levels of cash held by institutional investors."
- Robert Parkes, equity strategist at HSBC: “You have to remember where we were before the rally. The markets were pricing in depression. In effect, the market is now pricing in a recession. The economic data is deteriorating, but not as sharply as it was.
"The banks are also key to the rise in sentiment. Fears of nationalisation or some going out of business have receded. Corporate earnings may still be bad, but they are not as bad as they were in the fourth quarter of last year. Markets tend to move up before economies do. We think the markets may go on rallying for another six months."
- David Rosenberg: "We acknowledge that we have felt like salmon swimming upstream. And, we constantly preach that everyone should keep an open mind and about the dangers of being perma-bears at the low (not our intention!) – but it’s time to set the record straight.
"Big money investors have been on the sidelines. Big-money investors have been on the sidelines through this entire move. From our lens – and you can see this clearly from the twice-monthly NYSE data – the buying power for this market has actually come from severe short-covering as the bears head for the hills.
"By and large, this rally has been a clear technical event. Gaps get filled rapidly and the primary source of buying power seems to be coming from a huge short-squeeze. To be sure, there is always the chance that the dry powder (money on the sidelines) is put to work and investors chase this rally. And nothing says that the S&P 500 cannot go as high as the 200-day moving average of 970 over the near term. We have seen these kinds of rallies in the past – but the fundamental downtrend was obviously still intact.
"Stock market not good at predicting inflection points The stock market’s track record is just about as good as the economics community at predicting the inflection points in the business cycle – and that’s not very good.
"Forward P/E multiple of 15x operating and 30x on reported EPS are not that compelling. So, we do not have a strong valuation argument. We do not have a strong earnings argument. The seasonals ("sell in May”) are about to become less compelling too.
"New lows in S&P won’t happen as soon as we thought. We would, at the same time, acknowledge that if the terms of engagement have changed, the Obama economics team and the Fed have made it exceedingly difficult for the shorts to make money in this market. Tail risks, notably in terms of the banking system, have been removed. This, in turn, does mean that even if we break to new lows in the S&P 500, it probably will not happen as soon as we had thought.
"The worst is over. In any event, the economy has certainly passed its worst point of the cycle even if we do not yet see the bottom that many others do at this time. And it may very well be that we overstayed our bearish call on the equity market and that the lows were turned in on March 9. Many pundits who have been around far longer seem to believe that, and they could be right. "
"We are in year 9 of an 18-year secular bear market. The S&P 500 peaked in real terms back in August 2000. Adjusted for the CPI, it is down 58% since that time. So, we would say that we are in year 9 of what is likely to be an 18-year secular bear market, because if you look at long waves in the past, they tend to last about 18 years with near perfection.
"Past the half-way point in the recession. First, our in-house model of predicting where we are in the cycle, for the first time, gave us a signal late last week that we are past the half-way point in the recession. Considering that the stock market bottoms 60% of the way through, this is an encouraging signpost.
"Stock market has lagged relative to other asset classes
"All an equity bull really has to do is point to the fact that the S&P 500 last September was trading around 1200. The only difference is back then we were looking at it from the perspective of being 20% off the highs whereas a move back to September levels, which, after all, would only mimic what many other market indicators have accomplished, would be viewed as an 80% surge off the lows not to mention another 35% potential upside from where we are today. Even the CRB raw industrials are now back to where they last October when the S&P 500 was hovering around the 950 level. So again, if we were equity bulls, and maybe we should be, we would simply point out that of all the asset classes that have bounced back to life, the stock market has actually been a laggard.
"We could be on the precipice of a cyclical upturn. Investors have been able to price out financial tail risks. The market is gravitating to a new mean. Still not sold on the bull case for equities."
- Kevin Lane of Fusion IQ: “The S&P 500 Index had stalled at the 878 level on three separate occasions over the past five months. However, prices then subsequently gave way to profit-taking and closed back below that level. Only a close above that level would open the way to higher prices.
"On the sentiment front, the CBOE Equity Put/Call Ratio, the AAII Bearish Sentiment Survey and the VIX’s deviation from its 50-day moving average have all moderated from constructive levels to more neutral levels. … these indicators are not at levels that would suggest sentiment is overly bullish yet, but their deterioration is enough cause for concern that a corrective wave may occur."
- Anthony Bolton, president of investments at Fidelity International in London: "All the things are in place for the bear market to have ended. When there’s a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I’d like to bet against that.
"I look at three main things Worst 10 years ever for stocks in America. 57% decline is the worst bear market ever. Sentiment extremely negative. Valuations are at extremes. I do not spend time looking at economic data. Though even here the second derivative is changing rapidly."
- Michael Kahn: "Most technical indicators for the broad market still suggest somewhat unstable conditions, the most noteworthy being the historically high VIX (shorthand for the Chicago Board Options Exchange Volatility Index) readings. Therefore, we must take all charts with a grain of salt and a bit more caution than normal.
"Given that the broad market -- the Standard & Poor's 500, for example -- has not been able to follow the Nasdaq with a breakout of its own we cannot chase performance. The risk is too great.
"There is a technical tendency I have observed over the years -- a weak market does not hang around resistance for very long. Weak markets run to resistance and then fall away. The reason is that strong bearish hands take immediate advantage of perceived high prices to sell and sell heavily. Timid bears are given little chance to sell comfortably.
"With the S&P 500 spending several weeks just below resistance, there seems to be little interest on the part of the bears to step up their selling. As we know, there are two sides to any trade. While it may be true that the bears are not aggressively selling, it also seems true that the bulls are not aggressively buying. Wednesday morning's nice rally lacked volume support to suggest that there was no real enthusiasm to own stocks in anticipation of a significant continuation of the rally.
"For the S&P 500, the argument for a new leg up will only be valid if and when the index closes at a new high with strong volume support."
- BNP Paribas: "Over the past equity bubble decade, it has become fashionable for equity analysts to concentrate on Operating earnings as opposed to As Reported earnings, which factor in write-offs and restructuring charges. While the difference between the two measures was insignificant until the internet bubble, that difference has grown significantly to the extent that operating earnings look like numbers plucked out of thin air with little resemblance to economic reality. As credit analysts, we are taught that, for a given revenue base, rising costs lower profits, raise leverage and lower creditworthiness. How equity analysts can ignore this fundamental credit analysis is unfathomable to us.
"Using current valuations, if one were to calculate the P/E multiple on 2009 earnings, one lands up with 14x using operating earnings and 30x using as reported earnings. We will leave investors to make their own judgment but P/E multiples of 30x certainly scream bubble to us.
"The recent secondary offering by Goldman Sachs, could well mark the top of this bear market rally because GS, we believe would only issue equity at these valuations for two reasons, namely because it needed to as losses on its highly illiquid Level 3 assets continue to mount, or because it saw its equity valuation as being grossly overpriced.
"Time will tell, how significant this GS top will be but for now it makes us very wary of equities, especially US financials, as they have become the playground of day-traders."
- Sy Harding: "The history of first-term presidencies suggest that the current bear market will end either this year or next.
"There's a strong tendency for each new presidential administration to do whatever it takes to make sure the economy and market will be strong when reelection time rolls around four years later. Of the 19 bear markets since 1917 -- I define a bear market as one in which stocks fall at least 20% -- 15 ended in the first or second year of a presidential term, so that the economy and stock prices had recovered by the time the next election took place.
"Add in the gigantic stimulus plan that began in the last year of the Bush administration -- usually such programs are smaller and start in the first or second year of the new president's term -- and the bottom could be seen in 2009, perhaps in October, after a retest of the March low."
- Kevin Gardiner from HSBC: "News flow does justify what the markets have done so far. The trend is an upward trend for sure. Cannot say if you are definitively past the bottom. I think you have to be crazy to say anything definitive these days. Volatility still pretty high. Still are potentially very dangerous markets. Notional portfolios are tilted towards beta bounce. Sectors and regions which have exposure to financial risk and economic risk. A few months back we were looking at a possible bank failure or the failure of the banking system. We thought we could be headed towards another great depression. It looks now neither of these two things will materialize."
Full Disclosure: No positions