From the Contrarian Files

From time to time a headline strikes us as an especially fraught suggestion that the investing herd is buying or selling en masse, often quite late in whatever the latest game might be. In Monday's Wall Street Journal, Shefali Anand came up with a classic of the genre: "A Taste for Risk--Again." Here's how the story opens:

It's amazing the difference a rally can make in investors' appetite for risk.

A few months ago, mutual-fund investors were yanking money out of stocks and high-quality corporate-bond funds and parking it in safer places, like money-market funds and U.S. Treasurys. Lately, however, as stock and bond markets have rebounded, mutual-fund investors have had a split personality.

They're back to buying relatively safe investments like high-quality corporate bonds. But they're also pouring money into the riskiest investments. They're lukewarm toward U.S. stocks but plunging into high-octane vehicles like emerging-market companies, commodities and junk bonds--making these among the 10 best-selling mutual-fund categories this year.

Unfortunately, the story doesn't deliver enough compelling data to get our contrarian hackles all the way up, but it's one of those things that gives us pause.

And here's another ingredient in our current caution. In the chart below, you'll see how the 20-day moving average of the S&P 500 (the red line) provided support on two key occasions during the rally off the market's March lows (especially on April 20^th/21^st and throughout mid-May). Then on June 15^th the S&P closed right on the 20-day, broke below it on the 16^th, and bumped its head on it at the start of July. In addition, the 20-day has rolled over.

In the relatively short term, we don't make much of moving average crossovers, but we've certainly noticed that the 20-day is now moving lower for the first time since the middle of March.

None of this is to say that the rally can't or won't re-ignite. But the Summer's burden of proof may have shifted from the bears back to the bulls.

click to enlarge

Source

Shefali Anand, "A Taste for Risk--Again," Wall Street Journal, July 6, 2009

Comments

[Larry House:]

Spot on. We are in a "wait and see" mode right now.

Jul 10 11:11 AM

[Thomas MacLeod:]

Doesn't the strenght of emerging mkt and corporate bonds especially junk tell you something? If the mkt were really bearish otherrisky assets should be falling but they remain strong!

Jul 10 10:38 PM

[Maxe Paul:]

The risk at this stage is that the long bear market has reemerged, in which we will lose all the gains from March, or we bounce off the low 800 S&P area and retest highs later in the year.

This month though we are 100% going to see further downside, no arguments there i would think.

Jul 11 05:58 AM

[bartpr:]

look at the 10 and 20 week ma of spy or nasd. after an up move of pirce and the 10 and 20 there is always a correction. the price will often go bolow the 10 then the 20 before a new advance. the price is now below the 10 and will probably go below the 20 next. that means more downside before a new advance.

go back several years for a comparison. the risk is that once the 20 is penetrated if there is continued down where the 10 and 20 go down again the bear is still alive. right now it is too soon to tell. predictions are just that.

Jul 11 07:20 AM