This Bull Keeps Charging

SAN FRANCISCO -- Whether you believe he's a ray of light or whistling past the graveyard, Don Hays of Hays Advisory Group in Nashville, Tenn., was shining a little brighter and/or whistling a lot louder today.

As reported previously, Hays has been pushing a bullish case for some time now. But he dramatically upped the ante in a late-morning conference call today, declaring himself more bullish than at any time since mid-1996. In addition to a short-term rally he's been predicting since late May, Hays said, "as of right now, I feel better about the long-term nature of the market than I've felt in long time."

Previously, the veteran strategist had been predicting a replay of the 1980 scenario: A three-to-six month rally followed by another sharp downturn next year.

Coincidentally or not, Hays' call coincided with the market shrugging off its recent weakness today: The Dow Jones Industrial Average rose 1%, the S&P 500 gained 0.7% and the Nasdaq Composite climbed 1.6%.

As discussed in RealMoney.com's Columnist Conversation, today's call summed up several themes Hays has been talking about recently. To wit:

Rising pessimism. As noted Monday, the one-day Arms Index hit 2.52 last Friday, pushing the 10-day reading to 1.661 vs. a peak of 1.657 near the Dow's March low. (Also, the equity-only put/call ratio hit 0.9617, or just below its March high of 0.9726. The Chicago Board Options Exchange total put/call ratio hit 1.071, compared with its March high of 1.076.

On the call, Hays noted that pessimism produced similar double-tops as measured by the Arms Index at three past key turning points: In 1962 on May 28 and Oct. 1; in 1974 on Sept. 30 and Nov. 19, and in 1987 on Oct. 16 and Nov. 30.

In all three cases, the market rallied after the first peak, then came back down sharply, generating "extreme fear" that provided significant buying opportunities, Hays said. "We believe very strongly this will be a time once again where fear is intense but the wall [of worry] will hold."

Hays noted particular similarities to the 1962 scenario. That year, the Dow bottomed at around 536 on May 28, then rallied to around 620 (a 15.7% gain) before swooning for nine weeks. The index then hit a "lower low" 16 days after the Oct. 1 second peak in the Arms Index. "But that cleared the air for a four-year bull market that took the Dow from that first low of 536 to a high of 1001," Hays recalled, predicting that the Dow could post a similar percentage move from its recent levels.

As for the Nasdaq, he said it "may have one more plunge, but will do like [it did] on April 3 and will bounce quickly." To recall, the Comp rose over 40% from its April 4 closing low to its closing best on May 22.

In response to a question, Hays said he watches the Chicago Board Options Exchange Volatility Index (VIX) and Investors Intelligence survey but does not believe either is an "ironclad" indicator of investor sentiment.

Also on the sentiment front, Hays noted that some better-known gurus, such as Goldman Sachs' Abby Cohen, are getting a bit skittish. Indeed, save for Edward Kerschner of UBS Warburg, few of the erstwhile permabulls are willing to stick their necks out here. But Kerschner has been pushing the bullish case for a while now -- far longer than Hays or prudence dictates, that is.

A deflationary cycle that is beneficial, because it is productivity-induced. This was the most controversial part of the call to me, because it's currently fashionable to decry the "productivity miracle" as a myth. But Hays believes otherwise, describing technology as a historic force on par with -- if not greater than -- the agricultural and industrial revolutions. "People are scoffing, but I think anyone who does not recognize they're more productive now is living in a cocoon," he said. "I know saying 'this time is different' is dangerous, but people are going to have to revise economic theories."

Productivity will keep inflation at bay and when inflation is moving down, price-to-earnings ratios can move up, Hays said, adding that higher P/Es are justifiable because of productivity enhancements. (For another view, see Ben Stein's recent column.)

Some unrecognized improvements in the economy, including the index of leading economic indicators, falling energy prices, falling bond yields and the tax rebates. (Other factors: consumer confidence, retail sales, the housing market and jobless claims.)

"The negatives being pushed today are as ill-timed and ill-conceived as the positives [being pushed] in June last year," Hays said.

Unrecognized improvements underneath the surface of the market. In addition to improvements in the new high/new low and advance/decline tallies, this so-called stealth bull market is evident in the fact that the Value Line Arithmetic Index is now up 13.2% since Dec. 20, while the Russell 2000 is up 7.5% and the S&P MidCap 400 is up 3.9%. Additionally, the percentage of Big Board stocks trading above their 200-day moving average has gone from 52% on Dec. 20 to 62% as of yesterday's close.

While expecting market cap-weighted averages to rally sharply, Hays believes small- and mid-caps will continue to outperform as they continue to make up for their performance lag of the late 1990s.

Hays did not recommend specific stocks but forecast that health care, tech and financials will be the best-performing sectors going forward. Still, he maintains an overweight in energy in the recommended weightings on his Web site.

Disclaimer

To err is human and Hays clearly demonstrated that he's of this world with his recent ill-timed rally calls. I seek not to lionize the strategist.

Still, the Dow remains above levels reached in late March, when Hays last came out swinging the bull so vigorously. Furthermore, while some of Hays' short-term calls have proven shaky, his long-term track record of long-term market calls is impressive.

If nothing else, give the guy credit for having the courage of his convictions, to come out and make this call when (almost) everyone else is headed for the exits or nowhere to be found.

Bottom line: If this rally call proves prescient, Hays will be this column's "Guru of the Year" after being runner-up last year. If the call doesn't pan out, we'll report that with equal zeal.

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