Is the Bull Market Over, or Are Stocks Cheap?

I am a news junkie.

I think that’s fairly apparent to readers from the weekend linkfests. And, despite the fact that I have warned in the past that reading the news is hazardous to your investment returns (see Lose the News), I do occasionally like to Use the News — but for other reasons.

I find it quite interesting to see how different financial publications respond to market turmoil. Sometimes, it can be incidentally revealing of the psychology of the moment.

Consider these two articles: One is a Bloomberg piece which came out over the weekend, and the other is on the front page of the WSJ.

The WSJ article is a balanced look at two different schools of thought regarding last week’s action.  Its starts by asking "Is the bull market over?". However, it outs itself by describing the Dow’s 4.23% sell off as "stock-market carnage." Students of market history will derisively  snort of a four percent weekly drop as carnage.

Here is an excerpt:

"There have been some signs of a roof forming lately. Markets have seen a series of records, with big stocks beginning to lead the way and fewer stocks showing gains. When the Dow industrials hit their record just above 14000 on July 19, many second-tier stocks didn’t join them; indeed, after a strong start, small stocks are down for 2007. Meanwhile, money managers who were skeptical for much of the past year showed signs of greed, setting aside doubts and jumping into the market.

At the same time, until last week, middle-size stocks had been holding up better than small ones, and the gradual topping out hadn’t gotten very far. Financial, consumer, telecommunications and health-care stocks, as well as real-estate stocks and utilities, all had turned down, but technology, energy, basic materials and industrial stocks all were holding up well. Market interest rates had risen, but not heavily. Moreover, even after last week, the Dow’s worst in more than four years, the index remains up 6.4% in 2007 and 18.2% in the past 52 weeks."

The author, E.S. Browning, manages to raise many technical and fundamental issues without taking a stand on either side. It is a nuanced, balanced piece, characterized as lacking any shrill emotional elements.

The Bloomberg article is far less balanced:  It starts by claiming "Investors are preparing to snap up shares of telephone, health-care and computer companies after last week’s $2.1 trillion global stock market rout left U.S. equities the cheapest in 16 years."  The key identifier to the tone is this quote: "The window for buying is starting to open." 

The rest of the article mostly quotes bulls, who say the market is cheap. The one note of caution is  Ryan Beck’s market strategist Kevin Caron. He is "defensive” and plans to keep 35 percent of his clients’ assets in cash.

My takeaway from both pieces — alternatively neutral or bullish — is that neither reflects any sort of mass fear or panic. They are relatively bloodless  columns; no one is running around with their "hair on fire."

It may only be anecdotal, but neither of these suggest capitulation.


Finally, consider this unscientific WSJ online survey: About an equal number of voters expect a big rebound as a big decline (18/17%). While 36% expect a small bounce back, almost as many (29%) expect a small decline or a sideways week.   


courtesy of Online WSJ

My wholly unscientific read of this poll — lets call it anecdotal evidence — is that there is hardly the sort of rampant fear one associates with a true and lasting bottom . . .


Bottom line: Watch for the market bounce, keeping a close eye on volume and breadth.


Analysts Debate If Bull Market Has Peaked
For Some, Charts Warn Hurricane Is Forming; Will Storm Pass Over?
July 30, 2007; Page A1

Cheapest Stocks in 16 Years Entice Investors   
Lynn Thomasson and Eric Martin
Bloomberg, July 30 2007

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What's been said:

Discussions found on the web:
  1. johntron commented on Jul 30

    It would be so much better and less painful for everyone if there was a big Monday morning washout…..but from the futures and overseas action looks like that won’t happen.

    Will the first real bounce get sold hard? And as many people pointed out….the big serious waterfall declines in the market (1929, 1987, 1998, 2002, etc) happened after the major indicies already were in 15%+ correction mode.

    I’d be worried if oil has a washout and nat gas continues to fall….tells of higher recession probabilities.

  2. ECONOMISTA NON GRATA commented on Jul 30

    It’s all just “TRASH TALK” to me…. You would think that we’re in high school waiting for the homecomming game….

    Sure, there’s got to be a bounce somewhere along the line, however, there is no doubt that therre has been a dymanic change in the landscape. American Home Mtg…? I guess that we can set that one aside as well…. Stocks are acting like a concentrated real estate market, more price identification, and far more efficient markets.

    My personal opinion is, anecdotally, that we are close to the end of maximum efficiency of the current tech cycle and the markets are relying on paper thin margins. The longer it takes the marketss to adjust to this reality, the more severe the adjustment is going to be….

    I am tryiing to anticipate some possitive events outside of the earnings conversations. I can not see anything that I find convincing enough to lead me to the conclusion that we shouldget back on a bull market track…. Everyone seems to be grabbing at straws, hoping to pull something out… The cat is out of the bag, and it’s going to bee very difficult to put it back in again….

    I’m off on my sailboat until tomorrow w/o any communication. Good luck to all…


  3. Philippe commented on Jul 30

    Risks and assets are just starting to be reeapraised and it will not take much more than a little default of payment on a LBO, to convince participants that either the prices are high or the cash flows are not only low now but may be lower later.
    As for the equities markets they can girate in theoritical values but we have seen the theory translated into practice with the CDO

  4. Sailorman commented on Jul 30

    It seems to me that no one is talking about the bond market except Bill Gross and it is the bond market that is driving this. What sense does it make to analyze this from a technical perspective using stock market averages? The approach seem to assume that the bond market does not directly influence the stock market.

    I have yet to see an intelligent discussion of what might happen to the credit markets as people discover the magnitude of the problem.

    I read on one blog that the sub prime mess is contained – contained to three continents!

  5. will rahal commented on Jul 30

    Funny how with all the distractions, nobody is reflecting on the poor Durable Goods Orders report. The proxy for Business Investment-NonDefense Capital Goods ex Aircraft-was even weaker. If you take the NDCxA as percentage of Durable Goods Orders you can notice how the great years of Investments ended early this decade.
    For comparison I plotted it against the Semiconductor Index(SOX).
    See “Business Investment: Strike two”

  6. zell commented on Jul 30

    No reason for capitulation at least till the market fulfills it’s fabled need for a health inducing 10% correction. For the construct that is the market to be replaced with a new mindset only erosion will do it. The prevalent sound heard from corporate America will be oops… then after a while, oh shit on the street. A bull market climbs a wall of worry while a bear market descends a staircase of fading dreams – the essential one being that Bernanke will be calling out the bucket brigade which is the foundation of reckless risk acceptance.

  7. Fred commented on Jul 30

    I’d expect some sizable RP’s from the Fed somtime soon.

  8. scorpio commented on Jul 30

    what are we to make of a market and a Fed that blows bubbles seriatim? 97,98, 00, 06-07? four in a decade? following greenspan and ayn rand, a Fed which takes NO INTEREST in the derivatives and loans on banks’ books because THE MARKET IS ALWAYS RIGHT, even when history, not to mention RECENT HISTORY, shows the market is always happy to overshoot when there’s easy money and credit around? i know the Fed has been packed w Bush midgets but this is getting ridiculous.

  9. m3 commented on Jul 30

    the action this morning is pathetic.

    bulls, i expect more out of you.

    get it together.

    this is sad.

  10. Bullion commented on Jul 30

    Stock market crashes are a thing of the past….

  11. mhm commented on Jul 30

    Headline in forex feed: “Carry trades roar back overnight”

    A new week and all is forgotten…

  12. speedlet commented on Jul 30

    Last week, the Dow fell a whopping 4.2%.

    4.2% off doesn’t really fit my definition of “on sale”.

    When’s the last time you saw an ad that said “CLEARANCE SALE — 4.2% OFF!”?

    Now, 20% off — that’s a sale.

  13. Barry Ritholtz commented on Jul 30

    Dislamer, IP address, for the penalty of chronically mistating my views and/or market positions, and otherwise annoying your overlord/host, hereby bans you.

    GYOFB . . .

  14. The Big Picture commented on Jul 31


    Futures are higher this morning on positive earnings news, strength in Europe, and a dearth of any new credit disasters. As we mentioned yesterday, investors should watch the quality of this overall bounce, keeping a close eye on volume and breadth, to…

  15. speedlet commented on Jul 31

    Disclaimer, we hardly knew ye.

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