Analysts optimistic despite dire warnings
ALEX ROSLIN
SPECIAL TO THE GAZETTE
The
Markets around the world are getting their heads caved in, and investors and analysts are in a flutter about how much worse the damage could get.
The bloodbath, stoked by the U.S. housing debacle, lopped eight per cent off the value of the Standard & Poor’s 500 index and S&P/Toronto Stock Exchange composite index in just three weeks.
Some sectors like energy stocks fared worse, with leading U.S. energy-stock indexes down 15 per cent off their late July top before rebounding a little last week.
Losses from the market rout totaled an estimated $2 trillion in the
The carnage has some analysts predicting an outright stock collapse, just weeks after the major stock indexes were powering to lofty new highs.
Forbes magazine last week published an article titled The Crash of 2007, which advised readers to sell most of their investments and go sailing.
“There is a really high probability that we are in the midst of a stock market crash, the first since 2002,” the writer said.
Not so fast, says Mark Arbeter, chief market technician at S&P Equity Research in
“There are times when you say, ‘I don’t know and have to wait,’” he said. “(But) I think there’s a better than 50-50 chance that we have seen the worst of this.”
Matthew Pugsley, chief
Both analysts are cautiously optimistic for differing reasons. Arbeter studies price charts and investor sentiment to arrive at his conclusions. His read is that sentiment has gotten so bearish so quickly, it’s actually a positive sign.
This is based on the contrarian notion that the crowd is usually wrong at critical market junctures.
“I think it’s constructive that investors threw everything out at the same time,” he said. “There’s been a selling capitulation. The internals got completely annihilated. There are so many people who got negative in such a hurry here. It’s like the world was coming to an end in two weeks.”
Analyst Mark Hulbert had a similar take in a column in Barron’s last Wednesday. Hulbert tracks a long list of investment newsletters to see how negative or positive they are on the markets. His finding: the newsletters were so bearish as of last Monday, they recommended only 5.4-per-cent exposure to stocks and nearly 95 per cent of portfolios to cash.
That’s a sharp contrast to what happened after the March 2000 top of the dot-com bubble, Hulbert wrote. In the weeks that followed, newsletter editors become even more steadfastly bullish in the face of the worst market crash in decades.
“That is classic market-top behavior,” Hulbert said. “Today, in contrast, we’re not seeing anything like the stubborn bullishness that was prevalent then.”
What it means, he said, is we’re not yet at the end to the five-year bull market.
Pugsley’s optimism, in contrast, is driven by market fundamentals. He believes the economy remains solid despite the woes that hit housing. He is bullish on a longer-term basis, saying he believes stock prices will be higher in 12 months than today.
“We expected a correction,” he said. “Now that we’re in one, I don’t want to get more negative. In fact, it makes me more positive because (asset) values improve.”
However, Pugsley says the coming weeks will see continued ups and downs as investors shift their anxiety from the sub-prime mess in real estate to underachieving third-quarter corporate earnings.
“The market will shift its concern from the credit market to the economy,” he said.
Pugsley predicted equities will bounce upward a little but fail to follow through and then drop to retest their early August low, possibly even breaking to a somewhat lower point.
“But I wouldn’t expect we will have sustainable new lows, barring some exogenous shock,” he said.
Wild cards that could upset this rosy scenario, he said, include a sharp spike in crude oil prices or an inflationary shock that ratchets up interest rates.
Like Pugsley, Arbeter predicts equities indexes will waft upward, fail to gain wind and then swoon to retest their early August low.
“The retest usually scares people—including myself—to death, usually on bad news,” he said. “If the market does hold at that level, that would be bullish.”
In fact, Arbeter said sentiment has gotten so dismal, an eventual recovery could catch downbeat investors by surprise—a scenario that could see them scrambling to get back into the markets and send prices to new highs in November or December.
“Conditions exist for some kind of potential upside explosion,” he said. “(But) expect a lot of volatility near-term.”
The analysts’ overall bullishness is reinforced by data from the U.S. Commodity Futures Trading Commission, which reports on futures and options holdings of investment firms, hedge funds and commodity producers.
In June, commercial hedging firms—often known as the “smart money” because of their accuracy in calling market turns—accumulated one of their highest relative net long positions in Dow Jones industrial average futures and options since the data started in 1995.
Meanwhile, large speculators—known as the “dumb money” because they are usually positioned the wrong way in the markets—built their largest net short position in NASDAQ 100 index futures and options in two years.
However, a warning sign comes from the data for the S&P 500, where small traders (who also tend to be wrong in the markets) started to place gigantic bullish bets in mid-June. In the past, that’s usually meant the S&P 500 would fall, as it did shortly after.
[Accompanying charts for this story showed the uptrends since mid-2006 of the S&P 500, FTSE, S&P/TSX composite index and Oil Services Holders, and how they've being tested or violated during the recent correction.]
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