Fork in the Road

“When you come to a fork in the road, take it.”

-Yogi Berra


The quote above describes the dilemma that investors find themselves in. They are at a fork in the road, and the noise machine all around them is advising that take it. The amusing issue, alluded to but never answered by Yogi, is which way to go.

The credit crisis blew up a mere 3 years ago; the recency effect has investors fearing a replay of that crisis, only centered on European instead of US banks. Bloomberg observes more than $75B in fund withdrawals have been pulled from U.S. equity funds since the end of April (Fund Withdrawals Top Lehman as $75B Pulled). That is more than the five month withdrawal after the collapse of Lehman Brothers.  US stocks have lost $2.1 trillion in market cap May 2011.

Wall Street is lagging the trading. Street Strategists started the year looking for solid gains, including year end consensus targets of 1365 on the S&P 500 — about 8 12% higher from Friday’s close. They have been tripping over themselves to lower their SPX predictions, but as the WSJ observes, they are still looking relatively bullish (Wall Street’s Optimism Fades).

Hence, our Stew of Negativity is fairly well understood: Start with fears of another 2008 bank crisis; add a new cyclical recession as your two base ingredients of investor’s worries. Season that with the ongoing de-leveraging and the long slow recovery process that typically follows credit crises; add the accompanying housing overhang, merely half way through its rush towards 10 million foreclosures. Salt & Pepper to taste.

Are there any positives? Sentiment is negative, markets are oversold. As mentioned last week, I wished sentiment and oversold readings were more extreme to pull the trigger to get long. Missing the 5.3% pop [UPDATE: To clarify, I mean for a trade; I still have a 50% long exposure via value/dividend equities] last week was not enough to pull me further (or get me excited) about the long side, but it may have worked off some of the oversold conditions.

In the hunt for the contrary indicators, I noticed a few modestly interesting items, most from Mike Santoli’s Barron’s column this week, History Lessons. Amongst the notable data points Mike notes:

• “Nasdaq had its best weekly gain since July 2009.”

• Deutsche Bank Strategist Binky Chadha said that outflows from stock mutual funds were “comparable to those around March 2009

• Short interest relative to market capitalization has “exceeded any level going back to exceeded any level going back to 2009.

Monthly Merrill Lynch fund manager survey revealed “the lowest risk appetite since early 2009.

• Ratio of corporate-insider stock sales to purchases has been at or below 10 for six straight weeks, for the first time since January to March of 2009.

• Citi global equity strategist Robert Buckland notes global cuts in corporate earnings forecasts “have had their weakest five weeks since 2009.”

Those are the positives, though they are hardly compelling. I am unsure of the history of using outflows over so short a period, and I recall outflows were strong for 2 years. The fund manager survey is broad, and is questionable as a timing tool.  Insider stock sales t0 purchases ratio tend to accelerate during a downturn; they can broadly inform but have a greater value when they reach extremes. Cuts in corporate earning forecasts similarly don’t make me bullish; nor should the weakest 5 weeks of cuts (really?) give anyone comfort.

The only data point in the list that warrants close attention is the Short interest relative to market capitalization. High short interest can equal a squeeze play. It acts as buying power on any move Think of how QE2 liquidity moved equities higher August 2010, eventually leading to an equity pile in.

Investors are now at a fork in the road; Yogi would suggest they take it . . .

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