This is the second part of a two-part column. Please be sure to read part one.
Other Hounds Smell a Rat
As you might expect, market watchers with a skeptical bent view sentiment in a far different light. To paraphrase
: One guru's meat is another guru's poison.
"The market will not be able to permanently shake out of its doldrums until the majority responds to these retracement rallies with skepticism and apathy rather than relief and joy," commented Jerry Wang of
Schaeffer's Investment Research
After three days above 0.60 to end last week, the 21-day moving average of the
Chicago Board Options Exchange
equity put/call ratio entered this week at 0.55, Wang noted. For the three prior weeks, the moving average had been "traipsing between" 0.52 and 0.54.
A rise in
put-buying indicates more participants believe the market will fall, which might be viewed positively for contrarian reasons. But Wang recalled the put/call ratio's moving average also waffled between 0.52 and 0.54 from Jan. 19 to Feb. 14 until the stock market "imploded" and the ratio vaulted back up to 0.69. "Although it would be too ambitious to predict a similar catastrophe for the next two months," he continued, "it is clear that the intermediate-term risks of being in the market currently far outweigh the potential rewards."
Today, the equity put/call ratio dipped to 0.58.
Wang is one of many contributors at Schaeffer's, which adopted a long-term bearish stance on
Feb. 27, although it has made some bullish short-term calls since.
Alan Newman, editor of
, has been preaching caution since long before February, and continues to do so.
"I'm amazed at how much bullishness is out there," he said today.
Regarding investors' faith in the
Fed, Newman noted that in the seven previous instances the Fed has cut rates five times in a cycle -- 1930, 1937, 1971, 1975, 1982, 1986 and 1991 -- the Dow posted an average loss of 1.4% in the six months that followed. After four rate cuts, the Dow's average gain has been 11.8% in 10 instances.
A fifth rate cut is "usually a sign of weakness" and not something to be excited about, he continued. "We believe there has already been a widespread discounting of a return to economic normalcy by the market averages, without any accompanying evidence that a recovery is near."
Newman sees Dow 12,000 as a possibility for later this year, but only as investors flock to the relative safety of Dow stocks. "Most other issues would suffer by comparison."
Douglas Cliggott, market strategist at
J.P. Morgan Chase
, suffered in comparison with more bullish gurus until last year's market rout. Now, he's one of the Street's more revered sages.
Today, Cliggott took (unintentional) aim at one of Galvin's reasons to be bullish, noting cash balances of domestic equity mutual funds declined to 5.1% in April vs. 5.4% in March. "Not an earth-shaking move," he conceded, but "we think cash balances continued to decline in May." Furthermore, a change of 0.3 percentage points equates to about $10 billion at current asset levels.
Additionally, he noted how the CBOE volatility index, or VIX, fell 7.9% in May after dropping 16.6% in April. (Today, the VIX slid 4.7% to 22.83.)
"Clearly, sentiment can improve more and cash balances can fall further, but in terms of the liquidity trade, we think the easy money has been made," the strategist surmised.
Reflecting that outlook, and after reviewing first-quarter S&P 500 earnings and "initial data" for the second quarter, Cliggott today lowered his 2001 EPS estimate to $50. That's 9.3% below 2000's actual $55.12 and 8.4% below the
Thomson Financial/First Call
consensus estimate for 2001 of $54.57.
Owing to the declining EPS estimate, he lowered his year-end target for the S&P 500 to 1200 from 1300.
The Envelope, Please
The thing about sentiment is that it's nebulous enough to be defined however a given guru chooses. Thus, it's fair to say all the gurus are "right" about what sentiment is saying. However, they can't all be correct in terms of what sentiment portends for the market.
For whatever it's worth, I think there's evidence of excessive optimism. For example, that stocks such as
can rally because the bad news isn't as gruesome as feared, and/or because of heavy existing short positions.
But I also believe investors' stubborn faith in the Fed is enough to keep market averages in a rising trend for the foreseeable future, which will compel more of that cash from the sidelines. That, in turn, will help propel the market higher still. And so on, and so on ... until it becomes evident that all the king's horses and all the king's rate cuts haven't put Humpty-Dumpty back together again.
When that will occur is hard to say, but Hays' September-October time frame seems a pretty good estimation, certainly from a historical standpoint.
(For a GuruVision primer, check out
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.