Schaeffer's Media Outtake: Five Reasons Why the 'Rally is Bogus' Argument May Be Bogus
 |
Bernie Schaeffer Schaeffers Research.com |
|
"5 Reasons the Rally is Built on Quicksand"
(David Rosenberg – currently of Gluskin Sheff and former chief economist at Merrill Lynch – 9/10/09)
"16 Reasons for Equities Markets to Fall Soon"
(Seeking Alpha – 9/8/09)
Schaeffer's addendum: It's difficult to take an aggressive stand against a 50%-plus stock market rally off what could prove to be a major bottom unless you make some tenuous assumptions.
- The stock market (collectively through those who are driving prices higher) is somehow not aware of the economic "facts of life" – Rosenberg notes that "during this six-month 50%+ rally in the S&P 500, the U.S. economy has shed 2.4 million jobs" and "It is completely unknown (for some reason) that corporate revenues are running at a -25% year-over-year rate, which compares to the -10% we saw at the worst part of the 2001-02 bear market and the -3% trend at the most negative point in 1991." The Seeking Alpha piece reminds us that "the latest Factory Orders figures were a disappointing +1.3% vs. an expected +2.3%" and that "unemployment continues to grow. Last week's announcement put it at 9.7%." The thinking here seems to be that if the bears could only yell these figures loudly enough, and the fools who are buying would just stop long enough to listen, the rally would collapse of its own weight. In truth, the stock market is a discounting mechanism that is infinitely more concerned with tomorrow's economy than today's, and major moves in the market have often preceded turning points in the economy that few economists predicted.
- "My forecasts are accurate; the stock market's implicit assumptions are irrational" – Seeking Alpha: "The Flu Season has started ... This is a worldwide problem. The 'real pandemic' is just beginning to take hold. It will have serious negative economic effects." Rosenberg: "For a Keynesian, government stimulus is necessary, but the question for an investor is the multiple one attaches to a global economy that is still relying on a defibrillator. The problem is that governments do not create income or wealth, and today's stimulus is really a future tax liability. Curiously, that future tax liability is likely going to pose a roadblock for the return to a 'normalized' $80 operating EPS estimate that strategists are now starting to pen in for 2011."
- The market is overvalued (fundamentally) and overbought (technically) – This time, strength will not beget more strength, but instead it will sow the seeds of its own destruction. Rosenberg: "This remains a hope-based rally (with strong technicals) ... Valuation is a poor timing device but even on 'normalized' trailing 10-year earnings, the S&P 500 is trading near 18x, which is now above the historical average of 16x." Seeking Alpha: "The equities markets have had a huge run up of over 50%. They are overbought. At approximately 18x 2009 earnings, they are priced far above fair value ... The charts are indicating a topping pattern."
- The "smart money" is bearish – Seeking Alpha: "The Insider Selling/Insider Buying ratio is 30.6. This is the highest that ratio has been since it has been tracked (2004). Those corporate officers probably know something ... Wegelin & Co., Switzerland's oldest bank, is telling wealthy clients to sell their U.S. assets. Other Swiss banks may follow suit."
- The prominence of these bearish "check lists" can be viewed as a bullish "all clear" signal for further market gains – As I stated in an Aug. 26 commentary "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." Is the prominence of "bearish check lists" a sign of the 'disbelief" that accompanies a rally that has much further to go before it peaks? I'd suggest that this is the case, as it is an indication that there may be significant sideline money that has (literally) not "bought into" the bullish case and will ultimate help drive the market higher as "disbelief" gives way to "acceptance."
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.