Schaeffer's Media Outtakes: The Harbingers of Disbelief
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Bernie Schaeffer Schaeffers Research .com |
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"[As] an ... investor, you are probably wondering ... whether you should be jumping on to the equity market rally ... That might be dangerous. Headline equity index returns, year to date, are desperately misleading. There is, in fact, a two-tier market in operation: speculative (or, more politely, "growth") stocks, which have done fantastically, and everything else ... And an analysis of the Altman Z Score ... shows that the frankly flakiest companies have seen their shares hugely outperform the rest of the market even as their capital strength deteriorates. In short, this has been a rally driven by junk ... With credit provision in full-scale withdrawal, does it really make sense to be contemplating bank stocks as investments, not least given the messy governmental scrutiny at work in the sector? And if private sector credit availability is set for broad retreat throughout the Anglo-Saxon economies, how on earth can our nascent economic recovery be described as anything other than pale, sickly and fragile? Equity markets have rallied nicely from their lows, but a degree of realism is surely in order."
(Financial Times – "Beware the bubble's distorted allure" – 8/25/09)
"It feels good to be right. But the few analysts who accurately called the market's bottom in early March aren't feeling so great about where stocks are headed. One of the most famous of this group, Jeremy Grantham, penned a note on March 10 entitled 'Reinvesting When Terrified' that encouraged investors to buy, suggesting stocks were 30% undervalued ... Mr. Grantham sees 'seven lean years' of a sluggish market ahead, to atone for what the firm believes was a long era of overpriced stocks, according to his newsletter ... Other analysts are glummer about the near-term outlook."
(The Wall Street Journal – "Those Who Called Bottom in March Say Prices Look Overvalued" – 8/24/09)
"The 'cash for clunkers' program may be ending on Main Street, but there's another one that seems to be thriving on Wall Street. Investors who are interested in fundamentals and longer-term growth prospects would be wise not to participate in the stock market's version ... For example, Citigroup Inc. (C), which dipped below a buck in intraday trading twice in March, has made some feverish upside moves since late July including four one-day gains in excess of 8% ... Joe Saluzzi, co-head of equity trading at Themis Trading, pointed out that just four stocks - Citigroup, Bank of America Corp. (BAC), Fannie Mae (FNM) and Freddie Mac (FRE) - combined to account for one-fifth of the overall U.S. equity market volume on Friday. Saluzzi said investors should be aware, if not beware, of this type of concentrated trading, because while money can still be made, it can be lost just as quickly. The traders who tend to get involved in these types of markets are notoriously fickle... Barclays Capital quantitative analyst Matthew Rothman said in a recent research note that 'low quality' names, or those seen with the most negative growth prospects, have outperformed 'quality' names by nearly 5% since mid-June ... Basically, it has become fashionable to buy off the clearance rack. The stocks might be slightly damaged, and the longer-term outlook is still uncertain at best, but they are cheap, they are moving and a lot of other people seem to be doing the same thing."
(Dow Jones News Wire – "Avoid Wall Street Version Of Cash For Clunkers" – 8/25/09)
"Speculation rather than economic fundamentals has driven this year's sharp rally in stocks, and equities may now be 20 percent overpriced, said the managing partner at hedge fund firm Bullman Investment Management. Nick Bullman, who told Reuters he has this week placed bets on falling share prices, is concerned that government stimulus packages have not revived bank lending as much as hoped and that conditions remain as tough for companies as they did last year. 'The rally has been a 'dash for trash' based on speculation ... I think the U.S. equity market is potentially up to 20 percent overvalued over the short term.'"
(Reuters – "Stock rally is 'dash for trash'" – 8/21/09)
Schaeffer's addendum:
There are four distinct sentiment backdrops or themes that accompany the ascendancy of the market from a bear-market bottom to a bull-market top. At bear-market bottoms, the theme is "despair." The initial rally off this bottom is accompanied by "disbelief." Eventually, as the rally persists, the backdrop becomes one of "acceptance." And, of course, the ultimate market top is accompanied by "euphoria."
While I don't deny that this market still has some questions to answer before the "all-clear" signal for a renewed bull market can be sounded, there is little doubt that much of the current sentiment backdrop can be characterized as "disbelief," as exemplified by this cluster of media skepticism over the past week: "In short, this has been a rally driven by junk." "Avoid Wall Street's version of 'cash for clunkers.'" "The rally has been a 'dash for trash' based on speculation." Might these be harbingers of disbelief? Do you think?
As for the Citigroups and the Freddie Macs and the AIGs that have been leading the way, no one is suggesting that these have remotely become "blue chips." But consider how horribly wrong Wall Street analysts have been all year by emphasizing the "high quality" names that have mostly gone nowhere. And consider the huge sums that have been lost by short sellers who piled in, lemming-like, to place bearish bets on these mini-priced names in the first quarter. Consider also that these same constituencies have been quite vocal in panning the "junk-based" rally off the bottom, and then ask yourself whether you're comfortable that they're viewing the current situation objectively, or whether they're simply "doubling down" on a losing hand. Also, ask whether you should look at the skepticism surrounding this phenomenon and see it as part of a "wall of worry" that suggests even further upside.
As for those who correctly called the March bottom and who are now bearish, the question becomes whether they remain the smart money, or whether they've become part of a contrarian "stay long" signal, a theme of which might be, "Those who were bearish back then are still bearish, and those who were bullish back then are bearish now."
Bernie Schaeffer:
• Developed Expectational Analysis®, a proprietary, three-tiered method of options analysis combining technical and fundamental studies with the analysis of investor sentiment.
Publisher
• In 1981, Bernie launched the newsletter, Bernie Schaeffer’s Option Advisor. Serving as senior editor since inception, Bernie has led the Option Advisor to become the nation’s leading options newsletter. Features: market commentary, specific trade recommendations, and trading strategy.
• Launched SchaeffersResearch.com, in 1997. A four-time winner of Forbes “Best of the Web” award, the website has also received positive mention in Barron’s, AAII and The Wall Street Journal Guide to Online Investing - “An independent options site that is one of the best for providing primers for both novice and advanced investors.” Features tools, quotes, data, commentary, and education.
• 10 Days to Successful Options TradingSM – This multi-media home study program teaches options basics. Learn fundamental strategies with hands-on application exercises and examples.
Author
• The Option Advisor: Wealth-Building Techniques Using Equity and Index Options (1997)
• New Thinking in Technical Analysis: Trading Models from the Masters – The industry has viewed Bernie’s Expectational Analysis® methodology as a groundbreaking approach to trading. Proof of this came with the publication of this new book by Bloomberg Press. One of twelve authors, Bernie was honored to be chosen from hundreds of market analysts to explain his methodology.
• Writes a monthly options column for Bloomberg Personal Finance magazine.
• Multexinvestor.com regularly calls on Bernie to contribute to their “Analyst Corner.”
Awards and Recognition
• Three time winner of The Wall Street Journal stock picking contest.
• Ranks fifth among market timers tracked by Timer Digest for the past decade.
• Dick Davis Hall of Fame inductee for his bearish posture ahead of the 1987 crash.
• He is known for successfully maintaining a bullish market posture throughout the 1990s.
• The Market Technician’s Association (MTA) awarded Bernie “Best of the Best” in 1997 in the field of Sentiment/Psychological Analysis.
• Bernie is regularly featured on investment chats on Yahoo! Finance.
• Bernie’s views on the stock market and the economy are regularly quoted in The Wall Street Journal, The New York Times, BusinessWeek, Investor’s Business Daily, and USA Today.
• Both Barron’s and The New York Times have featured Bernie in “Question & Answer” interviews.
• Recognized as a CNBC “Market Maven.”
• Appears regularly on national financial broadcasts such as CNBC, CNN, Bloomberg Television, the Nightly Business Report, Wall Street Week with Fortune and Fox News. Also serves as a guest host on CNNfn.
• Frequently invited to speak at national investment conferences and seminars.
• Regularly sits on Options Industry Council panels around the country.
• One of 50 market strategists appearing in BusinessWeek’s 2001 market forecast.