Contemplating the Bull and Bear Case

This bull market is getting, like Rodney Dangerfield, no respect. Expect the underinvested to capitulate (and buy stocks) by the end of the year.

- Steve Leuthold, Chief Investment Officer, The Leuthold Group, quoted in “Time To Reassess If Stocks Can Gain More”, E.S. Browning, The Wall Street Journal, September 8, C1

In my view, the next 12-16 weeks will be extremely important in shedding light on any incipient economic recovery. Investors have become so used to the idea that stocks often foreshadow economic strength that actual, convincing evidence has been dispensable - beyond excitement over “less bad” economic news. The next 12-16 weeks will change that.

- John Hussman, The Hussman Funds, “Showtime for Visible Roots and Fruit”, Weekly Market Comment, September 8

Above are two quotes from today from highly respected, successful money managers - with completely divergent viewpoints about the economy and the stock market rally. To match the divergence of opinion there is evidence supporting both the bull and bear case. I’ve been making the bear case in this space for many months now so let me mention a few points for the bulls.

Last Monday, two big acquisitions were announced. Disney (DIS) is acquiring Marvel Entertainment (MVL) for $4 billion and Baker Hughes (BHI) bought BJ Services (BJS) for $5.5 billion. On Tuesday, eBay (EBAY) announced the sale of a 65% stake in Skype to private investors. The week before, specialty drug maker Warner Chilcott (WCRX) was able to raise $4 billion in the leveraged loan market to finance its purchase of Procter & Gamble’s (PG) drug business.

“The dialogue with CEOs is different now than it was just two months ago. They are no longer worried about catching a falling knife and are now worried about getting left behind,” said Paul Parker, head of global mergers and acquisitions at Barclays Capital. This kind of deal making is a bullish sign.

Last Tuesday, The Institute for Supply Management’s August Index of Manufacturing Index came in very strong at 52.9 - the highest since June 2007. The strength was driven by new orders which were up 9.6 points from July to 64.9 - the highest level since December 2004. Norbert Ore, chair of the survey, went so far as to say,

The year and a half decline in manufacturing output has come to an end.

Even the much anticipated August Jobs Report released last Friday morning was better than expected. The 216,000 loss in jobs is still ugly but notably less than recent declines.

*****

Last Tuesday’s selloff got my attention because of the strong volume. Volume has been light for many months now and that session had the feel of more conviction than usual of late.

But the action over the last four sessions has reverted to low volume, boring trading. An attached chart of the SP 500 SPDR ETF (SPY) shows the spike in volume last Tuesday and the dropoff over the last 4 sessions. The same trend has been in play for all stocks traded on the NYSE. Like I said last Tuesday, I need to see a follow through day (a big selloff on strong volume) to have conviction that the rally is over.

Click to enlarge:

One interesting thing about the Leuthold and Hussman quotes is their shared belief that the rest of the year will be critical. Leuthold is clearly expecting the economy to continue to impress and force stubborn bears (like me) to capitulate and buy. Hussman also sees the next 12-16 weeks as being critical but suggests the economy could fail to live up to the hype and, as a result, the market could weaken before year end.

What an interesting time in the stock market. The divergence of opinion and data creates a lot of opportunity for those who get it right. In due time, the current stock market enigma will resolve itself and we’ll be able to look back with 20/20 hindsight. For now, patience is the order of the day.

Comments

[NUCLEAR1929:]

there is no bulls left, how people dont understand that to be a bull one needs money, bulls died in 2008

Sep 09 09:56 AM

[untrusting ...:]

Aha... now that's the $64 billion dollar question ... to get it right. For those that guess it right some decent profits, but for those that get it wrong, some pretty big losses. Lots of risk either way. It does appear that the big risk takers betting on the upside have done pretty well at this point, but that can change in a real hurry too. Will be interesting to see how that risk works out over the next 2-6 months.

Sep 10 12:08 AM

[action:]

I think this bullish market is going flat in two weeks and all these coments about bear or bull is going to end soon

Sep 10 02:16 AM

[tresspass:]

we're in a recovery but none like ever before. the nature of the dynamics have changed, mainly a tectonic transfer of wealth to the leading players in the emerging so called 3rd world.

that's the wave you want to be on---whether thru those nations listed on our exchanges or thru the few remaining western countries that play in that playground.

Nov 03 01:42 PM