Wednesday's session demonstrated
again that a high level of bullishness isn't always a great contrarian indicator or market-timing tool. Another rise in bullishness in Chartcraft.com's Investors Intelligence survey produced barely a ripple in the stock market. Traders were more concerned about company warnings and lowered guidance but even amid that, major averages ended mixed and well off their worst levels of the session. The Investors Intelligence survey showed bullishness among newsletter writers rose to 60.2% from 58.7% a week ago while bearish sentiment declined to a 16-year low of 16.1% from 16.3%. The spread between bulls and the bears is wider now than at any time during the 1990s, according to Phil Erlanger of Erlanger's Squeeze Play. "Such enthusiasm is usually seen after the market hits new highs," Erlanger wrote. "Granted the market is well off of its lows, but the commitment to the market now in force means the vast majority has bet on a hearty economic recovery. Any failure on the part of the economy to strongly improve will be a big problem for the bulls in the long-run." Granted, Erlanger has been skeptical about this rally for some time, as reported here. Interestingly, even some folks previously upbeat about the market are becoming more cautious. On Tuesday, Morgan Stanley strategist Steve Galbraith issued a take some money off the table call. On Wednesday, Scott Bleier, founder of HybridInvestors.com, went a step further, writing about how the rally ends and, by extension, when. To be sure, Bleier doesn't think the market is about to plummet, suggesting quarter-end window dressing -- the legal practice of fund managers buying more shares of names they already own to secure better closing prices for a given period -- will likely keep shares afloat until at least the end of June.
"The key will be when the
Federal Reserve removes the jumper cables," he wrote. "When they cut rates next week, bond yields will have a 'sell-the-news' response and go higher." (Yields went higher for a third-consecutive session Wednesday as the price of the benchmark 10-year note fell 26/32 to 102 8/32, its yield rising to 3.36%.) Bleier's scenario presumes any rate cut next week will be the Fed's last in its historic easing cycle. A big assumption, yes, but that's the theory. If the Fed defies expectations and doesn't ease -- highly unlikely given current fed funds futures' indications -- then Treasury market participants will infer the Fed sees stronger economic growth ahead and yields will also rise, he surmised. "So the Fed is damned if they do and damned if they don't." In addition to curtailing economic growth, higher bond yields mean more competition for stocks, which might induce a desire among equity traders to lock in profits, Bleier concluded. The time frame for the "great rationalization" by the market could occur as early as the week after July 4, he suggested. For the record, Bleier was an early adopter of the rally, having recommended tech names such as Macromedia ( MACR) in January and utilities such as Allette ( ALE) around the March lows. Although he's gotten more cautious as the Dow approached 8500 and then 9000, he acknowledged Wednesday "this rally has been, in actuality, one of the best rallies in the past decade -- simply because it is so broad." (On Wednesday, declining stocks led advancers in both Big Board and over-the-counter activity, a rarity in recent trading.) Given that, what's curious is "everybody" is seemingly asking when the rally ends, not what keeps it going. In sum, bears are sticking to their guns and bulls are starting to waffle, which provides a far different message than the II data.
With the saga about Freddie Mac ( FRE) seemingly fading from the headlines, Noland provides reason for continued vigilance. Actually, Noland isn't so much worried about Freddie specifically -- noting there's not much evidence of a major accounting scandal or derivatives loss. However, he does argue that "we now are in the throes of a historic mortgage finance bubble that, like the preceding telecom debt and equity bubbles, will end in tears." (Freddie Mac, of course, being an integral component of said bubble.) It takes a while to wade through -- Noland could use an editor if only for brevity's sake -- but if you want something to worry about, there's plenty there. Yes, Noland has been worrying about the same subject for some time now. But people said the same thing about Prudent Bear chieftain David Tice before he became a "bear market hero," which shouldn't be confused with the
juke box variety.