It's probably just a coincidence, but the rats and goons are fleeing their hideouts in Baghdad and Damascus right as sellers appear to be scramming from Wall Street.
That happy concurrence may mean it's finally time for investors to poke their heads out of the foxholes that they've dug themselves into over the past few years and notice that the shooting has stopped.
Whether recent market strength is just a cease-fire in a long-term bear market or a lasting peace, no one really knows. But the homogeny of buying in recent weeks across all market capitalizations, most sectors and both the growth and value styles suggest that it could be time to stop fretting about the current state of the economy, declining employment, uneven earnings reports and the potential for new geopolitical troubles; instead, recognize that the market knows all of this. And it's rising -- ever so gingerly -- anyway.
One certainly must be cautious. Danger still lurks in the shadows of many corporate balance sheets. Earnings estimates for the second and third quarters are coming down on average, not rising. And a deadly complacency may be creeping in already, as the widely observed gauge of sentiment, the CBOE Market Volatility Index, or VIX, shows that a euphoria has so seeped into option buyers' attitudes that they are willing to pay an exceedingly high premium for bullish bets.
Yet, these are controllable phantoms, not permanent demons. At present, serious economic woes, such as factory overcapacity and rising joblessness, may not have been resolved to the upside. But investors, taken collectively, try to preview the future, not review the past.
And since the start of the year, anticipating better business to come in a more peaceful and prosperous post-terrorist world, more stocks have risen than fallen. After a multimonth hiccup before and during the war, the prescient Weekly Leading Index of the Economic Cycles Research Institute resumed its upward path in the past two weeks, diminishing the likelihood of a second round of recession.
It's not just the broad market averages, dominated by large-cap stocks, that are on the move. Quite a few more names are up than down in the past four months. If you had randomly picked 10 stocks for your portfolio this year, you were likely to have chosen more that went up than down. And you'd be showing a profit even though the start of the year was a scary time to invest, following one of the worst Decembers in history.
Turning Toward the Bull
Several former bearish analysts and investment professionals, meanwhile, have made sweeping turns in their approach in recent weeks, in tune with the rebound.
institutional investment analysis model has rated all major indexes "Avoid" for the past three years. Late last week it turned tentatively bullish on U.S. equities, as it determined for the first time since the spring of 2002 that price momentum in the
had stopped falling. "The noteworthy positive turn does suggest a base is being built and that the primary bear market may finally be coming to an end," said Erik Hess, analyst at International Strategy and Investment, who studies the system.
. The nation's oldest institutional technical analysis service told subscribers on March 17 that the bear market appeared to have come to an end. It has since stuck with that view through several steep pullbacks. Its "selling pressure" index has declined to 10-month lows, suggesting that the amount of stock offered for sale has been steadily declining, while its "buying pressure" index has risen to new rally highs.
"This shows that investors are not willing to part with their stocks at current price levels, forcing buyers to bid up prices to complete their trades," the service said in a recent report. Lowry's, which had been emphatically negative prior to mid-March, now considers the U.S. equity markets to be in a "primary buying zone," a period of increasing demand and diminishing supply that generally yields a low-risk time to accumulate stocks.
. One of the few growth fund managers to post double-digit gains in the past three years due to a bearish point of view, Hussman said in his
weekly report to shareholders Sunday that he sees a good chance for a "full-featured shift in trend uniformity" in the weeks ahead. Hussman, whose
Strategic Growth Fund has more than $400 million in assets, judges market climates by their valuation and trend. He continues to think stocks are overvalued, but he now thinks that for the first time since Sept. 1, 2000, stocks have a shot at going up in unison. He told shareholders that he had begun to remove hedges, or derivative bets against the market, to preserve capital. In prior bear market rallies, he said he'd removed 20% to 40% of hedges; this time he plans to remove 60% of his hedges.
You may well wonder why, if everything's so great, market leaders such as
have barely budged after decent earnings reports last week.
And the answer may be that all is not well -- and bulls are about to get their heads handed to them. But if you happen to agree with these three that the worst of the fight is over, shake loose the self-doubt and grime and look forward into the prospects for calm.
Tough Stocks for a Postwar Rally
To exploit the notion that peace is at hand and a better economy should follow, conservative investors could simply buy a low-cost mutual fund that tracks the Wilshire 5000 index, such as the
Vanguard Total Stock Market Index. But a more intellectually advantaged way to show both true grit and imagination should permit you to hypothesize the types of stocks that should go up the most over the next few months or years.
In several recent columns, I have proposed ideas from
Robert Drach, Valu-Trac, "
defense and aerospace and
war rally plays. All of these ideas are still valid, in my view. All but the momentum stocks could be used as the basis of potential 12- to 18-month holdings.
For the most oomph in a relatively conservative portfolio, consider the war rally plays again. The previous bunch rose 20% from Feb. 10 to April 21 despite holding
, which was down 96%. It was amply counterbalanced by
, which is up 119%.
The theory for these names: Take positions in the lowest-priced, cheapest, worst-performing, most heavily shorted stocks in the S&P 500 index. If the market goes up 10%, these will probably go up 20% or more as fund managers and others "equitize" their cash by buying the index. Stocks with the lowest prices generally advance the most in these circumstances; short-sellers provide fuel for the up move; and their low valuations make them minimally palatable.
rose 6.5% on Thursday after a solid earnings report. As I suggested in my
Feb. 27 column, most of the strength came from its Frito-Lay and Quaker Oats divisions. Earnings rose to $777 million, or 45 cents a share, in the three months ended March 22, from $689 million, or 38 cents per share, a year earlier. The results beat Thomson Financial/First Call's average estimate of 42 cents per share. ... Defense stocks' earnings reports are coming in strong, as I suggested in my
April 3 column. Particularly impressive were reports from
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
email@example.com. At the time of publication, his fund was short Goodyear Tire & Rubber, but positions can change at any time.