Posts filed under “Investing”

Newsletter Sentiment Skews Very Bullish

There is a rather interesting and important column by Mark Hulbert this Sunday in the NYTimes. In it, he discusses the state of Bullish and Bearish sentiment.

Since this rally began over the summer, there has been an ongoing debate about whether there has been sentiment extremes. I have argued that the VIX, the put call ratio, the lack of 1 or 2% down days, and the reckless abandon which people have been buying equities has been signs of bullish sentiment. It had gotten frothy, but not quite excessive yet.

Others have said the "disbelief in this rally" proves the lack of excessive bullish sentiment. Dresdner Kleinwort’s James Montier notes that the rally has been driven by the "Fully Invested Bears and rampant complacency" — that hardly sounds like bearish sentiment is dominating  the discussion.

Although I always aim to use quantifiable data, rather than gut feel. The one exception has been the "propped up feel" to the market pre-Election: It started with the changes in the Goldman Sachs Commodity Index, which led to the huge energy complex sell off. Either Goldman’s commodity group is run by a bunch of clueless dolts and naives — or this was a purposeful attmept to influence the US mid-term elections.

The second "gut issue" has been the midnight Futures buyers — gobs of SPX futures bought 25 handles above closing prices smells like manipulation — at least, thats the verdict by several people with far more Wall Street  experience than I.

Since I am not a conspiracy fan by nature, let’s get back to quantifiable data, rather than gut feel. One measure that ha sbeen track fro a long time is the general "Bullishness" of newsletter writers.  According to Hulbert, investment newsletter editors are about as bullish as they have been in
nearly five years — and that doesn’t bode well for the stock market:

"When investors are wildly optimistic, head for the hills; when they are truly pessimistic, buy stocks. That, at least, is the counsel of contrarian analysis, which derives its name from the idea that the market, in the near term, rarely does what the majority expects it to do.

When pessimism and despair reach extreme levels, for example, contrarians believe that the market is at or near a bottom. That’s because any short-term traders who are likely to sell their stocks when conditions are unfavorable will have already dumped them — removing potential selling pressure that could drive the market still lower. The reverse is the case, the contrarians say, when optimism is extremely high.

Consider the sentiment that prevailed when the stock market hit a low in June this year. According to The Hulbert Financial Digest, investment newsletters that focused on timing the stock market’s short-term trend recommended, on average, that their subscribers allocate 88 percent of their equity portfolios to cash and the remainder to shorting the stock market — an aggressive bet that stocks would fall further. Far from declining, of course, the Dow Jones industrial average is now almost 1,500 points higher."

That’s the theory underlying contrarian sentiment analysis.

"By Nov. 24, by contrast, the average recommendation of this same group
of newsletters had changed greatly — to allocating nothing to the short
side of the market and 71 percent to the long side. Though the
newsletters cut their average recommended exposure by 12 percentage
points on Thursday, to 59 percent on the long side, the level is still
very high — double the average since the bull market began in October
2002."

Bottom line: At least by this one single measure, sentiment has reached a pretty aggressive level — not off the charts extreme, but certainly noteworthy.   

03stral

graphic courtesy of NYT
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As we noted last week, a modest short is in order in case last week’s market cracks expand. My gut says the Golidlocks crowd might have one last year end spurt in them.

I continue to marvel over the chasm between what is happening on trading desks/in the market, and the economic realities on the ground. Eventually, this "disconnect" will get resolved — either by the economy turning upwards, or the market turning downwards.

Meanwhile, we will continue to monitor our individual indicators and sector analysis.
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Source:
When Wall St. Looks Like Pamplona, Sound an Alarm
MARK HULBERT
Strategies
NYTimes, December 3, 20
http://www.nytimes.com/2006/12/03/business/yourmoney/03stra.html

Category: Investing, Markets, Psychology, Technical Analysis

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Recession: The Stage Is Set

Fascinating interview With Richard Arvedlund, Founder, Cypress Capital Management, who is not particularly optimistic on the economy going forward:


WE CAN ALWAYS COUNT ON RICHARD ARVEDLUND to take a different tack. Independent and bold calls on the economy come easy to this longtime money manager, who’s seen it all in his 30-plus-year career. But his balanced investment approach, with a focus on high-yielding, big-cap stocks combined with some bets on bonds, helps his clients preserve their capital as much as build it. The founder of Wilmington, Del.-based Cypress Capital Management, which has $450 million in assets and is now a unit of WSFS Financial, is at his best in troubled times. Trouble, the way he sees it, is straight ahead.

Barron’s: It took a year, but the calls you made when we last spoke are looking pretty good now.

Arvedlund: Well, until midyear the economy was running much stronger than I had thought it would. However, a GDP [growth domestic product] slowdown has clearly begun. The GDP growth rate dropped to 1.6% in the third quarter from 2.6% in the prior quarter and 5.6% in the first quarter. We have not seen GDP growth below 2% for four or five years. We now have preconditions in place for a recession.

Preconditions?

The preconditions would be the following: Whenever housing starts and permits drop by the rates of decline that have been exhibited — 10% to 20% — it has always preceded a recession. What is remarkably different in housing than just about any other sector of the economy is that whenever housing cycles turn down, and that’s happened twice in the last 30 years, once in the late ‘Seventies and once in the late ‘Eighties, the downturn tends to last much longer than people dream. The average cycle is three to four years.

Continue reading "Recession: The Stage Is Set"

Source:
Recession: The Stage Is Set
Interview With Richard Arvedlund, Founder, Cypress Capital Management
SANDRA WARD
Barron’s, Monday, November 13, 2006
http://online.barrons.com/article/SB116320501633920397.html

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