Conviction, Sentiment, and Market Moving Rumors

“Lack of conviction” or perhaps “wait-and-see,” really does seem a better way to characterize market action right now: rhetoric aside, it’s less about cult of the bear vs. cult of the man-cow and more about just plain being on tenterhooks.

As long as we’re in the trading range that we’ve been in for however long we’ve been in it, can intraday reactions to quasi-credible (or fully credible, for that matter) news really be extrapolated to a gauge of overall market sentiment?

When the market “makes” up it’s mind, I don’t believe we’ll be wondering what it’s going to do…as it’ll already have done it.

I offer that the day-to-day upside spikes have been more extreme than the downside spikes recently (IMHO). To me, that smells like greed.

In the same vein, during last week’s rally, what I gleaned from my stock screens was that the crap that had been getting beaten up was the crap performing best. That…also rings of greed.

That has become the backbone for my belief that the breakout from the trading range will be downward.

As the summer trading range meanders along week after week, investors have become more and more frustrated as they searched for reasons du jour why the market “isn’t going anywhere.” You can see this in the moving average of the put-call ratio and in the Investor’s Intelligence survey.

That’s just the way the crowd sentiment thing works. It’s not a great for spotting market turns on the dime, but it’s always interesting to note how whenever we’re retesting support each subsequent time, how more and more convinced folks become that Armageddon is fast approaching.

I think the increasing dourness over the past few months came to a temporary climax a couple weeks ago and is what actually fueled the recent rally. Whatever the news today, the market was due for a little backing and filling — just enough to restore a sense of hope to the shorts. I don’t think this little rally is quite over yet.

The problem with this market is that there is no market. Especially with light volume, the insiders are calling the shots, keeping the ball suspended in mid-air. It really has been just one big short squeeze since October.

Once they have finished the mopping up operations, my guess it will come down hard and fast.

from MARC FABER

It has also been my experience that investors tend to become attached to equities that are showing large losses in their portfolios in the hope of a recovery. Stocks such as Cisco (CSCO), Intel (INTC), Dell (DELL), Sun (SUNW), Oracle (ORCL), Yahoo (YHOO), Amazon (AMZN), and eBay (EBAY) are still widely held by the public, although a recovery to their previous highs is almost impossible. (The Nasdaq, despite its recovery since October 2002, is still down by more than 50%.) Had investors sold these shares in 2000 with moderate losses or still with some gains (depending on when they were bought during the late 1990s’ boom), it is likely that with a fresh mind or, as DeVoe points out, liberated “from the prison of past decisions”, they would have reinvested in the last five years in different and more promising equities. This is especially likely if they had taken into account my contention — expressed repeatedly during the last few years in these comments — that following the bursting of a bubble the leadership always changes.

So, selling one’s stocks occasionally (or taking one’s losses on short positions, which have moved up against one’s expectations) seems to be an excellent concept. In the world of investments, there will never be a shortage of opportunities for the patient, persistent, and disciplined investor.

The complacency DeVoe refers to concerning the housing market also exists — despite all the talk of widespread bearishness — for equities. It is true that sentiment readings have turned more bearish, but also consider the following. Barron’s reported in mid-July (after the market’s May–June sell-off) that “The State Street Investor Confidence Index” — a unique gauge that measures real-money investment flows among various asset classes and which is distilled to represent institutions’ relative risk-taking activity — showed, as of mid-June, a steep increase since February in institutions’ “confidence” or willingness to take on risk — specifically, equity risk. Because State Street is a huge asset custodian for global institutions, its clients’ behaviour is a representative snapshot of what traditional, longonly institutions are doing. Moreover, Barron’s reported that while the index had settled into a somewhat lower range since early 2004, “the latest reading was exceeded only once in the past two years, in March 2005, and then only slightly…”

Barron’s also referred to Robert Shiller, the author of Irrational Exuberance , whose work focuses on behavioural finance, and who compiles a monthly institutional investor confidence measure. It is quite a simple measure, which tallies the percentage of respondents who think the Dow will be higher in a year. The latest result, for May, showed that 92.6% of respondents believed the Dow would be up in a year — the highest level since Shiller started the survey in 1989! Finally, the COT [Consensus of Traders] Report shows that large speculators are holding their largest DJIA futures positions since the Bush re-election rally and that small speculators are holding a record number of Dow Jones Average futures by a multiple number.

That institutional investors have great “confidence” in the market rising soon is also evident from the Equity Mutual Funds cash to assets ratio. As Robert Prechter points out, it will take time to break fund managers’ complacency and to bring the cash to assets ratio to above 10%, which usually occurs at major market lows (1974, 1982, and 1991). Still, it is true that Investors’ Intelligence Sentiment Index readings have improved (less bullishness). As Ed Yardeni has pointed out, the bulls to bears ratio recently dropped to 1, which was the lowest reading since October 2002. However, because the stock market slide in May–June caught so many investors by surprise, resulting in not insignificant losses, unlike in 2002, this low sentiment reading may be more a reflection of “disappointed expectations” than of widespread bearishness. Also, I should like to emphasise that if the bulls to bears ratio could register continuous high readings from 2002 to May 2006, why couldn’t it stay at low readings for an extended period of time? Finally, I follow the NYSE Uptick–Downtick indicator (Tick index). From June 26 to July 24, this index rose to above 1000 (short-term buying panics) on more than 60 occasions. But how many times did it show a reading of minus 1000, which indicates some kind of short-term selling panic? On just six occasions. The Tick indicator would therefore, at present, indicate enormous latent bullishness rather than any strong desire to liquidate stock positions and to “get out at any cost”!

Lastly, the “tipping point” DeVoe refers to might come from a side that was totally overlooked until just very recently, but which was beginning to be reflected in the poor stock market action of many individual companies whose stocks no longer rose even on very positive earnings reports. So, whereas investors’ attention is still focused on the Fed increasing, maintaining, or lowering the Fed fund rate over the next few months, the market may start to focus more on the outlook for corporate profits.

Regards,
Marc Faber

I’ve been reading the Rev for years… be careful with his opinions, even when there’s been a consistent theme– he can pull a 180 in a new york minute. he holds stong opinions, weakly.

I think this may also be something that frequently infects RealMoney: lots of smart folks in that crowd that are comfortable discussing the bear case of a given issue or market condition (overwhelming majority of investors are not!). after a while you shut off your computer feeling like the whole world is one giant bear den.

More importantly, when you have been all over a looming problem (ie, inflation and housing)- both early and often- it’s natural to feel like it’s been slap wore out by the time you read a big expose in the WSJ.

Yet the institutions and individuals are just now being converted.
jw

Some readers (me included) have wondered aloud: hey, a major correction hasn’t come, so are we bears wrong? Now Barry expresses that doubt.

You know, before we invaded Iraq in 2003, there were quite a lot of folks who said we’d find no WMD and that Iraq would become a fiasco. Yet, it took a long time for (a) a preponderance of evidence to prove it and then (b) a majority of people to believe it. (A year or two or three.) A few months in, there were one or two days when I wondered whether luck was working in the administration’s favor. (“Better to be lucky than smart.”)

I don’t bring this up to make a political argument but to provide an example of how you can have one group of people read enough tea leaves to predict an outcome that doesn’t become mainstream for more than a year later.

It’s possible the secular bears, folks like Barry who research, believe and preach “the housing crash will drive economy into recession” message, are ahead of the curve by a similar duration. The economy is such a big system, it takes a long time for this train wreck to unfold before our eyes. It’s so slow that we bears even doubt our reasoning.

What’s the expression: “things don’t matter until they matter”? Is Barry’s doubt a sign that the moment he’s been waiting for — a significant move downward — will follow just after he’s converted to a moderate bull?

We shall see. I think bad things await.

CrispE points out: “Sorry….the only way to reestablish the economy now is for people to start acting responsibly with their money. ”

Remember the Bush tax rebate? The “responsible” thing to do with the money was to spend it. .

I’m sure the people in charge surely understand the economic investments China is making in Iran in exchange for oil. Ditto with Russia’s technology for money. In addition, Russia has a huge Muslim population, much of which is very fundamentalist, so why are they going to start beating their chest like Bush? To create domestic strife? That would be akin to Bush targeting fundamentalist or radical Christians with his message.

The other thing is Chavez is chafing at Bush for the pretty well accepted point that the CIA was involved in some shenanigans in Venezuala to disrupt stability a handful of years ago when we were dissatisfied with the election results. Of course Chavez is going to be a thorn in Bush’s side. Yet, he has also offered free heating oil to poor people in America. His foreign minister made it very clear their beef is with Bush and not America. Plus his heavy sour crude is only refinable on a large scale by the US. So, he has to sell to us and he surely will.

This is all gamesmanship. The trolls and thugs of the world sense Bush is vulnerable and they are piling on. A little bit of Nacho Libre. It doesn’t mean anything. It’s noise to the stock market and noise to the economy.