The Worst is Over

At the top of this post is an image of the cover of the latest issue of Time Magazine. The chart below the Time cover is a monthly chart of the housing stock index quoted on the Philadelphia stock exchange.

The historical low of the index was reached in March 2009, coincident with the low in the S&P 500. While the S&P 500 is currently trading about 30% below its all time high, the housing index stands 70% below its all time high and much closer to its all time low than the S&P.

The Time cover together with the fact that the housing index is still near the low of its historical range suggests to me that the worst is over for housing stocks. I doubt we shall see a return to all time highs in the index any time soon, but neither do I think the 2009 low will be taken out.

The important point here is that if the housing market in the U.S. can stabilize and recover, then the entire economy will get an extra upward push. This in turn will help lift the gloom that seems to have engulfed the the U.S.A. As the dark clouds begin to disperse the stock market will rally. I still think the S&P 500 is headed for 1300 and above over the next nine months.

Investors Flee Stock Market

At the top of this post you will find an image of Sunday's front page of The New York Times. I did a double take when I saw the headline: "In a striking shift investors flee stock market".

Underneath the front page image I have posted a chart showing monthly inflows and outflows to and from U.S. stock market (red bars) and bond market (gray bars) mutual funds.

Two things stand out on this chart.

First, money is flowing out of stock market mutual funds - a very unusual development. On a monthly basis it looks to me that outflows during the past three months have been greater than for any three month period since the March 2009 low. This is not surprising since the April-July drop in 2010 was twice as big as any other drop since March 2009.

Of course we already know that there is widespread bearish sentiment about the U.S. stock market. This information and the Times headline just confirms this judgment. It gives me confidence that the next big move in stocks from here will be upward.

Second, there has been an enormous inflow of money to bond funds. Since bond yields are at or near their historical low points I take this as a sign that an enormous bullish crowd (on bond prices, not yields!) has built up. I think this bond market crowd is similar to the stock market crowd that existed near the 2000 top in the stock market's internet boom. And I also think that we are very near the point where this bond market crowd will begin to disintegrate, thus sending yields higher and prices lower. I don't think we shall see U.S. bond yields this low again in our lifetimes.

Wheat

Friday morning my attention was caught by the headline you see above in the image of the front page of the New York Times: "Russia, crippled by drought, bans export of grain". On the surface this would seem to be bullish news for wheat prices. But notice how wheat traded on Friday on the Chicago Board of Trade - the market broke nearly 60 cents from its high of 815 the previous day. Someone took advantage of the buying this headline encouraged to sell a lot of wheat!

The real question from the contrarian trader's point of view is whether or not a big bullish crowd in wheat has developed. My answer to this question is no. Why? Take a look at the weekly wheat chart above this post. You can see that wheat is trading at roughly the midpoint of its historical range. Moreover, the recent wheat bull market has lasted only about 8 weeks, barely enough time to attract the public's attention.

So I think this headline marks only a temporary top in wheat. I see support in the 675-700 range and think the market is likely to move higher from there.

Cocoa

The image at the top of this post is the front page of Sunday's New York Times. At the lower left you will find a story about a hedge fund that apparently has "cornered" the cocoa market. In other words, the fund has bought so much cocoa that any further buying by anyone, in particular by shorts wanting to cover their positions, will send the price way up.

This is the sort of bullish story that you will find when a market is trading at or near its historical high point. Cocoa is in this case no exception to this rule. The monthly bar chart above shows the last 15 years of trading in cocoa futures and indeed the market is trading only a little below its historical high point.

The market cynic might ask why a hedge fund would want it known that it holds an enormous long position in a market and has it cornered. My answer is that that fund wants to sell its position. It wants to scare the shorts into covering and encourage new long positions by people who think this "corner" will push the market much higher.

I conclude that cocoa prices will be a lot lower 12 months from now.

Times and Tribune Tidbits

Here is the latest from weekend editions of The New York Times and the Chicago Tribune. I think these items are more evidence (as if we needed any) of the generally bearish views of the investing public.

The image immediately above this post is the front page of Saturday's Times. Stock market volatility is mentioned in the sub-head. In the story itself the recent stock market drop is offered as one explanation for rich people becoming more frugal. As headlines go this one is not a particularly strong indicator of bearish sentiment on a stand-alone basis. But in the context of the bearish drumbeat of the past two months it serves to reinforce my conclusion that bearish sentiment is still strong - not surprising since the low was made less than three weeks ago.

The middle item is the first part of a story in the business section of yesterday's Sunday Times. Jeremy Siegel, a long term stock market bull, was interviewed about his market prognosis. What I find interesting about the headline is the suggestion that "heading for the hills" is the natural investor reaction to the recent market drop.

Finally, the image at the top of this post comes from the business section in the Sunday edition of the Chicago Tribune. Such a strong reaction to Friday's drop is again evidence that a strong bearish crowd has developed over the past three months.

All in all I think that the bearish sentiment is strong enough to support an advance in the S&P 500 to the 1300 level and above over the next 8 months.

Small Investors Flee Stocks

The image immediately above this text appears on page 1 of today's Wall Street Journal. The graph within this clipping depicts the net weekly inflows into mutual funds which invest in the U.S. stock market. The latest downward red spike in this graph shows a greater outflow than in any week since the bear market ended in March 2009. One can infer from these data that small investors are quite pessimistic about the prospects for the U.S. stock market.

The chart at the top of this post comes courtesy of StockCharts.com. It shows the results of the weekly investors survey conducted by the American Association of Individual Investors. The latest reading shows the greatest percentage of bearish opinions since the March 2009 low.

These data show that the actions and expectations of small investors are in sync to the bearish side. The extent of bearishness is comparable to that seen at the March 2009 low point. I can only conclude that the bull market that began then is still underway and that the S&P has started an advance that will take it well above the 1300 level.

NYT highlights the bears

In the Business section of the July 4, Sunday New York Times there were two profiles of prominent market and economic pessimists.

Rogoff and Reinhart are two economists who collaborated on a book "This Time is Different" which recounts the history of financial crises over the past 800 years. Judging from their public statements they think that the consequences of the 2008-09 financial crisis will be serious and long lasting. The Times profiled them on the front page of the business section.

The fellow whose picture is at the top of this post needs no introduction. He is Robert Prechter of the Elliott Wave Theorist. He has been a vocal, long term bear on the world stock markets and the world economy for years. This story appeared inside the business section.

I think one can infer from this that the NYT business section editors believed that the thoughts of two prominent bears on the economy would be of interest to its readers on July 4. The media are in the business of telling people what they want to hear. So I take these two stories as more evidence highlighting the strength of a bearish investment crowd which has grown quickly during the current 15% drop in the averages. I think the next big move in stock prices from current levels will be upward.