GuruVision: Whither Gloom?
SAN FRANCISCO -- The most widely forecast rally of recent memory continued today, although inclement weather again kept a lid on trading activity. Still, a rally is a rally and the
Dow Jones Industrial Average
rose 0.3%, the
climbed 1%, and the
By saying the advance was "widely forecast," I refer not to the fact that high-profile Wall Street strategists remain bullish, as they were throughout 2000 and since Jan. 1. No bombshells in their latest weekly commentaries, unless you consider bulls being bullish newsworthy.
What is notable, however, is that some previously notorious bears have recently jumped on the rally bandwagon. To that growing list you can add Howard Rosencrans, director of research and senior security analyst at
HD Brous & Co.
, whose bearishness was recently described
Along with Alan Newman, editor of HD Brous'
, he is forecasting a bear market rally that could last as long as two months and take the Nasdaq back to its recent high of 2892. He sees investors starting to look ahead to expectations for a recovery (both economic and earnings) in 2002-03, which could provide an impetus for a near-term advance. Lest you think Rosencrans has completely transformed, he does not share the commonly held optimism about the market's long-term outlook, or that it's currently cheap. He believes the bear is just taking a breather.
"Intermediate term, the negatives have been discounted to some degree," Rosencrans said. "I think sentiment is pretty negative at this juncture. There is no longer any real expectation of 2001 having any saving grace."
But is "everybody"
negative? Christine Callies at
calls it the "palpable gloom that seems to pervade the investment community" (which, of course, she believes is unwarranted).
Contrary to Callies' claim, the majority of mainstream strategists on Wall Street remain bullish -- their average recommended asset allocation of 66.7% equities set another record high for optimism in March, according to a report today by Richard Bernstein, quantitative strategist at Merrill Lynch -- and more and more bears are turning bullish (even if just short term). That's hardly palpable gloom.
Moreover, it's certainly not evident among individuals, where bullishness rose to 46% last week vs. 26.3% previously, according to the
American Association of Individual Investors
. Bullishness among newsletter writers fell to 57.4% from 61.2%, according to
, but that's still high by historical standards.
One could argue that Bill Fleckenstein had a point when he commented here
last night that "everybody" is expecting a rally and thus might be primed for disappointment. (Meanwhile, to those critical of Fleckenstein for being a "broken clock," note that he did run money from the
side from 1982-1996. Regardless, do you apply the same clock critique to the perpetually bullish?)
Rosencrans conceded that bullishness is in the air, at least as it pertains to sentiment surveys. However, the best evidence of the negativity is not what people say, but what they are doing, he said. And investors are being generally "unwilling to take positions in stocks except for the very short-term."
This aversion to stocks was evidenced by the fact money market funds took in nearly $103 billion in January vs. $24.6 billion for equity funds, according to the
Investment Company Institute
Indeed, Rosencrans was unable to muster much in the way of how to play the short-term rally he's forecasting, other than a recommendation to buy
Transportacion Maritima Mexicana
, a Mexican transportation firm. He also mused about possibly covering his shorts, currently focused on financials such as
Morgan Stanley Dean Witter
Bank of America
. (Financial firm
issued a profits warning after the bell Tuesday.)
The point about investors' recent propensity to "talk the bullish talk" but refusal to "walk the walk" is compelling. But the sentiment figures still belie the widely held view that negativity prevails, which suggests we've reached a meaningful bottom, according to Bernie Schaeffer, senior editor at
Schaeffer's Investment Research,
a Cincinnati-based newsletter publisher that focuses on the options market.
After going neutral on Dec. 1, Schaeffer adopted a bearish stance on the S&P 500 last week for the first time since October 1987.
"From my perspective the probable downside at this juncture strongly outweighs the probable upside," he wrote. "I feel there are major risks to this economy and major risks to corporate earnings that are not being sufficiently recognized" by investors and analysts.
Schaeffer's switch from neutral to bearish was predicated on the S&P's violation of its 2000 low of 1254.46 last Monday, when it traded as low as 1241.73 before rallying to close at 1267.65.
The newsletter writer forecast the index could trade as low as 1000 -- or 20.2% below today's close of 1253.80 "depending on whether investor sentiment reaches the climactic negative levels that can support the case for a major market bottom. I feel we're nowhere close to such a 'capitulation point' right now."
Schaeffer was unavailable for additional comment, but I did speak with Joe Sunderman, manager of research at the firm.
In past declines, bullishness in the Investors Intelligence survey has "always gone into the high-20%
range before the market found a bottom," Sunderman said. "We haven't even come close to those kind of levels" in the current downturn.
Schaeffer's Investment Research focuses on the Investors Intelligence data because it has been around since the early 1960s, and thus has a longer track record than other commonly cited sentiment gauges.
This brings us to the issue of capitulation, a term that is bandied about without much explanation. To many, capitulation suggests some sort of market meltdown or crash. Several readers have noted, correctly, that not all bear markets end with such upheaval. From a contrarian point of view, the fact so many folks are expecting such capitulation means it likely won't occur, they say.
But to sentiment watchers such as Sunderman, capitulation means (in this case) steadfast bulls turning bearish, which doesn't necessarily have to occur after a selling panic. It could result from a "slow bleed" or a market that goes sideways for an extended period. "I don't know what's going to be the deciding factor to change the mindset" from bullish to bearish, he confessed, but expressed certainty it will change before a true bottom is in hand.
Finally, amid all this talk of fear (and loathing) in the marketplace and despite the recent carnage, it seems the thing many investors are most afraid of is missing out on the next rally. A little odd, isn't it?
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.