Return of the Hounds of GuruVille
SAN FRANCISCO -- It's been a long time since we rock 'n' rolled, but an even longer time since we've updated the GuruVision feature. So long, in fact, that tonight's offering is going to be in two parts.
For newcomers or those with short attention spans, GuruVision is a semiregular feature in which we analyze and assess the weekly commentaries of Wall Street strategists and various other market seers. (Check out
this story for a primer.)
Our return to GuruVille was prompted by a recurring theme in this week's offerings: The message of market sentiment, which (as it turns out) depends largely on each guru's particular point of view.
Not surprisingly, gurus who've been bullish since before, during, and after the bubble's bursting currently see sentiment as dour, which suggests a rally in the offing. (Sentiment is generally regarded as a contrarian indicator: Too much skepticism leads to market strength, and vice-versa.)
"Jitters abound over the fragility of the stock market rally," commented Jeffrey Applegate, chief investment strategist at
. "The stock market is slowly -- but we think surely -- climbing the classic wall of worry."
Applegate's tech-heavy "Strategy Portfolio" was down 24.4% in 2000 and off 22.6% in 2001 thru May 31 vs. losses of 9.1% and 4.4%, respectively, for the
. His tech-only "Virtual Economy Portfolio" was off 49% last year and 53.9% thru May 31 vs. declines of 39.2% and 14.6% for the
. So, he probably knows a little something about "walls of worry."
Currently, the strategist believes the earnings per share (EPS) trough is imminent, stronger
growth lies ahead and that stocks should continue to outperform bonds.
Applegate projects second-quarter S&P 500 earnings will be 18% below year-ago results. But the second-quarter will prove to be "the worst EPS momentum quarter," he projected, forecasting earnings down 11% in the third-quarter, and up 10% in the fourth vs. respective year-ago results.
"The stock market is probably in for some tough days this month but not enough to put the kibosh on the rally," he concluded.
This optimism about prospects for both earnings and GDP is based mainly on (
you guessed it
) the salutary impact of
rate cuts. Even if earnings should bottom later than he currently expects, Applegate takes solace that this would "prompt the Fed into further and faster ease."
Comments from the "Guru of Gurus" (aka Fed chairman
) inspired expectations for, and excitement about, additional Fed cuts today, which, in turn, inspired major averages. The
Dow Jones Industrial Average
rose 0.7%, the S&P 500 gained 0.5% and the
Credit Suisse First Boston
U.S. portfolio strategist Thomas Galvin also looked at sentiment this week via the results of CSFB's survey of its institutional clients.
Galvin cited as significant that although 92% of respondents believe major averages have bottomed, 37% have cash allocations of 10% or higher. The latter figure is "little changed from the market's freefall conditions last December," he noted. "No one is in a hurry to draw down cash reserves."
Turning to data compiled by the
Investment Company Institute
, Galvin observed equity-fund inflows totaled $20.6 billion this year thru April vs. $175.5 billion in January through April 2000. Conversely, money market funds took in $165 billion through April 2001 vs. $17 billion last year.
Meanwhile, equity-fund inflows of $19.2 billion in April 2001 were 46% below April 2000's intake. Additionally, tech funds have had net outflows in six of the past nine weeks, he noted, suggesting "investors were not impressed" with the Comp's big rebound from the April 4 lows.
Finally, bond funds took in $26.7 billion in April, outpacing equity funds for the first time since 1991.
"The bottom line is that conservative survey opinions are very much playing out in actual market activity," Galvin wrote. "No one is in any hurry, which ultimately is quite healthy for the market."
Galvin maintains an aggressive recommended allocation of 90% stocks and 10% cash, plus year-end targets of 12,000 for the Dow, 1450 for the S&P 500, and 2600 for the Comp. Still, today's comment preaches patience; "Pre-announcement risk
will keep buyers on the sidelines and short-sellers active" this month, the strategist wrote.
However, stocks will likely rally when actual earnings are reported because expectations will be so low, he continued. "In other words, the time to be aggressive should be the last week of June, which coincidentally is when the
Actually, it's no coincidence that Applegate's faith in the Fed is shared by other bullish gurus.
"This is a bull market that is going to continue to be fed on hope," Don Hays, of
Hays Advisory Group
in Nashville, Tenn., commented today. "And that hope is telling all those people that as long as the Fed is lowering interest rates, they should keep buying."
Hays has long believed the economy cannot avoid recession despite the aggressive rate cuts. But the rapid growth of money supply, plus the psychological impact of rate cuts will sustain the market through the summer, at least, Hays contends.
The strategist continues to believe the current environment will be
similar to 1980, when stocks rallied for six to eight months on the expectation of a Fed-induced recovery. When that recovery proved elusive, the market waffled for a bit then experienced the "crunching, air-clearing bear market of 1981-82," Hays recalled. "I believe that the first part of that comparison is still very much alive."
For the other side of the guru equation, click
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.