AAII Survey Most Bearish Since December, Goldman Lowers Q4 GDP, Hong Kong Riots - Contrarian Heaven

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Includes: CRM, MTCH, NOW, PYPL, ROKU, RVLV, SYMC, TWLO, WDAY
by: David H. Lerner
Summary

I take heart in the bearish AAII survey. This is a classic contrarian signal.

China is not going to "cut its nose to spite its face". It will only invite further internal instability.

Jefferies confirms my take on Revolve with a 150% higher price target. Buy.

Stick to the discipline and focus on the tech names that have little to do with China and everything to do with further growth.

The greater bearish sentiment gets the better

A closely watched survey shows investors are the most bearish on stocks they've been all year

  • A survey of stock-market sentiment managed by the American Association of Individual Investors found that traders are now the most bearish on equities since December.
  • The AAII Bull/Bear Ratio plunged into negative territory this week, meaning more investors expect stocks to decline over the next six months than expect a rise.
  • The decline in sentiment has coincided with increased market volatility that's expected to last through the summer.

For more detail: Markets Insider

The classic contrarian measure is bearishness. Most casual market participants would worry about such a bearish data item as the AAII survey. Except that you can measure how that bearishness is borne out by market performance. It is nearly always predictive of renewed market rallies or that a rally stays intact. There is a logic to this; if everyone is bullish, then where is the incremental buyer to push the market higher? If there is a significant amount of bears pulling funds out of equities, then the incremental buyer returns.

Also, in the case of our market up until recently, one would draw a conclusion that at the market high (S&P 3,030) we were fully valued at about 17-18 times forward earnings. So it really did make sense in regard to human nature to assume that since the market was stalling that naturally, it would fall. However, in my experience, the market chopping around at a near-record high could very well be consolidating and preparing for new highs.

All this will be academic if China does invade Hong Kong and goes Tiananmen Square. I believe this would be a temporary setback for the US economy, but a disaster for China, and possibly a death sentence for Xi. I can't believe that the Chinese leadership would do something so against their own interests, that they'd do something so stupid. So while current events are moderately negative for stocks this morning, I believe this is not going to blow up and crash our markets. It certainly is not a harbinger for a bear market for us.

Take a look at the list below

China hurting

CPI: 2.8% Y/Y

PPI: 0.3%y/y trade war causing deflation

Food: 9.1% y/y

Pork: 27% y/y

Food costs are not what it is like in the US. Food is a major segment of consumer spending for the Chinese rank and file. Pork is also a much larger portion of Chinese protein than in the US. I am no China expert, but Pork has a cultural aspect there as well. CPI in this survey is 2.8% and does not take into account the huge devalue of the Yuan; this will certainly raise costs for fuel and electricity.

If China goes into Hong Kong, the internal instability of all of China comes into play. I think China will look to de-escalate, allow Hong Kong to withdraw the extradition law in some face-saving manner. I think China is hoping that the protests will die down of its own accord. But for now, the possibility of disaster is there, frightening the average investor our of equities.

Another negative news item: Trade war uncertainty is noted by Goldman to lower growth expectations for Q4 @ 1.8% GDP. If I wanted to, I could list endless data items about how doom and calamity are coming. It is evident that the negativity has caused many market participants to withdraw from stocks. This, as a contrarian, is music to my ears, we are still more than 70% a consumer economy, most of our manufacturing is focused on domestic consumption, and things on Main Street are going fantastically. Now that interest rates are below 2% on the long-end, we can actually justify a higher value to S&P earnings.

On top of that, all this talk about recession, is just that, talk. Earnings for Q2 was much better than expected and I expect the same for Q3. Also, for the most part, our area of investment - technology is doing fantastically.

I urge you to stick to the plan, we have our double bottom, S&P 2,820 to 2,830. If we break that, then we will likely hold the 2,750 level. Look, September is traditionally the toughest month, and at times it leaks into the first week of October. So if you have a different time scale of several months, then the next few weeks are the BEST time to buy, NOT sell. Scan your lists and look for names that are below their 20% highs, and allocate your funds slowly over the next several weeks.

Keep an eye on Workday (WDAY), it's not under 20% yet but it's getting close. Also, ServiceNow (NOW) isn't there yet either, but it has been falling hard lately -14% in a hurry. Salesforce (CRM) in the pre-market is trading at $142, meaning that it's down 15% from its highs. PayPal (PYPL) -14%, Twilio (TWLO) down 13%. Match (MTCH) just blew away earnings and revenue. It dropped 8% in like two days, keep an eye on this name too. I would not be surprised that it falls down 20% in this kind of market.

What do all these names have in common? THEY HAVE NOTHING TO DO WITH CHINA. Also, they all have their bull cases intact. Just remember that once a name reaches 20%, it may create further selling, so please be smart about this. Don't grab the entire investment all at once.

On Friday, I came out strongly for Revolve Group (RVLV). For the full text, look at my August 9 piece, Symantec Sells Enterprise Business. We Are Witnessing The Birth Of LifeLock; Buy. Also Buy Revolve.

The item on RVLV might have gotten buried under the paragraphs I devoted to Symantec (SYMC), which by the way is still not too late to initiate a position in. I think RVLV is a very strong buy based on the interview of the two co-CEOs. I would say it was very similar to an interview I witnessed of the CEO of Roku Inc. (ROKU) right after the IPO. In no way, I am saying RVLV will ever scale to the level of ROKU. Still, just like then, the market is mispricing RVLV.

One iBank has come out to my thinking (see below), and they see 150% upside. I said it was just a double so you can go with the Jefferies Group estimate if you like.

Revolve Group had its price target raised by analysts at Jefferies Financial Group Inc. from $60.00 to $65.00. They now have a "buy" rating on the stock. 150.2% upside from the current price of $25.98.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.