The Dow Jones Industrial Average was flip-flopping around 9000 midday Thursday, and was up 0.2% at 8,972.97, somewhat below the psychologically significant level as of 1:50 p.m. EDT. More importantly, the stock market's overall tone was positive, again, and the bulls were coming back from pasture. "Slowly but surely, I see the convergence of several factors -- some technical and some fundamental -- that have shifted stocks, in my opinion, to a more bullish posture," Philip Ruffat, director of the Futures Division at Mizuho Securities USA, commented in a note to clients last night. "Subject to another catastrophe like September 11 it is my belief that equity valuations going forward for the rest of this year will be higher. In plain English: I've turned bullish." Ruffat, previously bearish on equities since late 2001, compared the process of his bullish conversion with that of nuclear physicists smashing particles in a nuclear accelerator and then analyzing the data. "At the risk of sounding cryptic ... as the process of discovery is running its course we find that certain business practices were flawed all along (shoddy accounting and misstating profits), flawed with respect to stockholders' equity (not expensing options) or just simply flawed in management ( Enron, WorldCom, etc.), he wrote. "Still, the adventures in capitalism we undertake on a daily basis tend to overshoot -- upwards and downwards. Eventually, as most things do, a reversion to the mean creates an area of opportunity within a bounded range of caution. We call this equilibrium -- and I believe we are in it." Ruffat expanded on this "bounded range of caution" theme in an interview this morning, stressing that he's not suggesting it's 1982 all over again. If the Dow rises much above 10,000 or the CBOE Market Volatility Index falls much below 27, "I don't want to be bullish then," he said. But "we've missed far enough of the bounce
and long term, we're going to look back and see this was a good buying opportunity." (For the record, Ruffat has no current position in equity volatility although he expects the VIX, which was lately up 0.1% to 31.67, to revert to its mean of around 27 or slightly below.) Furthermore, the large hedge funds that Mizuho Securities services are showing far less tolerance for short positions vs. earlier this year, Ruffat noted. For the first seven months of the year, many were positioned mainly from the short side. More recently, they've flattened their exposure and are starting to build positions from the long side, a process Ruffat believes will accelerate when the "senior guys" return from vacation after Labor Day. "Most guys we talk to don't care where the market is going, they want to know which side to play," he explained. "These guys are going to be pragmatic and say ' Now I'm playing from long side.'" Presuming one agrees with all of the above, there's still the sticky issue of valuations, which remain rich, with the price-to-earnings ratio of the S&P 500 at over 21 times 2001's earnings of $45.17 and at about 17.5 times forecasted earnings of $54.90 for 2003, according to Baseline. On that point, Ruffat argued "earnings will recover faster than some analysts think," aided by a stronger-than-expected economic recovery and companies' cost-cutting efforts during the past year (or so). "I think you have much leaner companies and, as a result, I think earnings are going to be surprisingly strong," he said, reiterating that today's call is about "the direction of stocks" not any specific industry. in it until we see great values again," Russell said. "That's going to take time." Notably, Schannep's own "timing indicator" is still at 50% invested at 8019.26 on July 19. "The momentum needed to complete this buy is still in the process of forming," he wrote. Schannep employs a combination of Dow Theory (his interpretation) plus a proprietary timing indicator to generate a "composite" timing indicator, which he last night lifted to 67% invested from the 50% invested on July 19. Schannep's Web site (www.thedowtheory.com) contains a detailed description of how his combined indicators have fared over the years. I encourage those interested in learning more to peruse them. July 24 I wrote: "If the market were really going to toy with people's emotions (as it is wont to do) what will happen is that day's rally will be built upon for a measurable degree of time and price, defying the naysayers. Then, just as folks start getting comfortable again, the bear will re-emerge more ferocious than ever." Nearly a month later it's clear part one -- additional rallying -- has occurred and the rising bullishness cited above suggests that part two -- folks getting more comfortable -- is starting to happen as well.