Thursday, June 16, 2011
Monday, June 13, 2011
Wow! The cover of the latest issue of Time Magazine is above this post. Black headlines bordered by red - the colors of danger and fear. The five myths cited on the cover are in my view not myths at all - but they are what Time thinks its readers believe and it is happy to reinforce those fears. The torn dollar whose pieces shrink in size moving from left to right (the direction of time progression) symbolize the shrinking values of stocks, real estate, and the US dollar, and the shrinking purchasing power of the dollar in times of high food and oil prices.
The New York Times chimed in Saturday with a stock market story on page 1, above the fold and just to the left of the headline column. "Stocks Plunge" is a pretty emotional description of what happened Friday and of the trend since May 2.
Take a look at the daily bar chart of the S&P 500 which goes back to the start of the bull market in March 2009. Notice the the S&P is above its rising 200 day moving average (red line), a fact that warrants the presumption that the bull market is still intact. Note too that the drop from the May 2 top is comparable to several other reactions seen within this bull market. In fact the market is still above the steep trend line (green dash line) I have drawn through the March 2009 and July 2010 lows. It is also above the April 2010 top.
Finally note that while the S&P is above its rising 200 day moving average it is well below its 50 day moving average (wiggly blue line), a typical buy configuration in a bull market.
Taken together these facts all point to a market which is offering aggressive contrarians a terrific buying opportunity. I think the S&P will be much higher 6 months from now and will probably reach the 1500 level before this bull market ends.
Thursday, June 9, 2011
As the saying goes, gloom among investors and the public is now so thick you can cut it with a knife.
The chart right above this post shows the 30 year record of people's expectations that their income will increase during the coming year. For the past two years this percentage has been hovering at its lowest levels of the past 30 years. During this time of pessimism the stock market has steadily advanced.
Of more immediate interest is the middle chart. It shows the results of the weekly survey of investor sentiment conducted by the American Association of Individual Investors. The blue line is the weekly ratio of the number of bears divided by the number of bulls plus the number of bears. The higher the number the more bearish is the average investor. The five week moving average of this poll is depicted by the red line.
On a moving average basis AAII investor sentiment is the most bearish it has been during the past 18 months, and is even more bearish that at last year's July low which ended a 17% drop. This is remarkable because the S&P 500 has dropped barely 9% from its May high.
In fact the latest drop looks perfectly normal in the context of corrections within this bull market (blue dash rectangles in top chart). The 200 day moving average (red line in top chart) is rising strongly and the market is well above it. The S&P is also well below its 50 day moving average.
This combination of circumstances is an buying opportunity for the aggressive contrarian. In my view the aggressive contrarian would have assumed an above average long position near the April 2011 lows after dropping to only a normal long position last November. So while no new buying is possible I think this above average long position should be held. The S&P should soon move to new highs for the bull market.