"And another one gone, and another one gone, another one bites the dust." -- Queen
NEW YORK (
) -- I don't know if you've heard, but there's a new saying going around Wall Street: "Bulls make money, bullish pigs make more money and bears get slaughtered."
This year, 2013, continues to be the year of the bear killer. One by one, we have seen a number of prominent bears throw in the towel. With nearly a straight up advance this year, the career risk of remaining bearish at this point is simply too high a price for most to pay.
The latest victim was Hugh Hendry of Eclectica, who turned bullish last week while acknowledging that after a 30% advance in the
Russell 2000 ETF
up even stronger over the past year he might be "providing a public utility as the last bear to capitulate." He went on to say that he can no longer "look himself in the mirror" as he has had to reject "everything
he has believed in."
Earlier this year, Richard Russell came to a similar conclusion, saying that while he knows "there are risks in buying an uncorrected advance that is becoming uncomfortably long in the tooth,
his suggestion is that
his subscribers should take a chance (after all, Columbus took a chance)."
We have also seen David Rosenberg of Gluskin Sheff, one of the more bearish economists over the past few years, turn bullish on the U.S. economy and equities. Rosenberg acknowledged in a recent interview that they have been "raising their equity weightings alongside" his view that "recession risk over time is coming down."
Even the valuation bears such as Jeremy Grantham (of GMO) and John Hussman (of Hussman Funds) seem to be calling for higher equity prices before an eventual decline. While Grantham is predicting negative real returns for U.S. equities over the next seven years, in his most recent letter he stated that his "personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year."
In a similar vein, John Hussman, who remains quite bearish on equities longer-term, recently purchased out-the-money call options in his fund to protect against a "further speculative blow-off in the shorter term."
Given this backdrop, the results of this week's Investors Intelligence sentiment poll are not all that surprising. The percentage of bears in the poll dropped to 14.4% this week, the fewest number of bears since March 1987. At the same time, the spread between bulls and bears rose to 41.3%, the highest levels since April 2011 and October 2007, both significant equity market tops (see chart below).
Of course, this sentiment backdrop does not guarantee an immediate decline and there are always exceptions. Momentum in U.S. equities remains strong here and seasonality remains favorable in December (when the S&P 500 is up for the year through November, it has had a positive December 80% of the time). Also, some will note that despite a similarly low level of bears in March of 1987, the S&P 500 continued to move higher until August of that year and did not crash until October.
While this is certainly true, I still believe a more subdued outlook is warranted, particularly looking out longer-term in positioning for 2014.
As you can see in the table below, we are currently at sentiment levels that have in the past been followed by the lowest average future returns for the S&P 500. For instance, the 12-month forward returns have been 1.6% following such high levels of bullishness, significantly below the average 12-month return of 8.3% in all time periods.
What the data are suggesting, then, is that the last of the bears may be capitulating here just when caution is most warranted.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.