So What?

Here is a chart of the Investor's Intelligence Advisor's survey that comes to us courtesty of Elliott Wave International. I want to use this chart to illustrate the futility of drawing anything other than relatively short term conclusions from sentiment data polls.

A large number of blogs and opinion makers I follow cite the current high level of bullish sentiment among newsletter writers as evidence that another bear market leg is about to start. Some even think it will drop the averages below their March 2009 lows.

I remember a similar situation back in June of 2003, about 8 months after the October 2002 bear market low (first vertical green arrow on the chart). At the time bullish sentiment was even higher than it is now (blue dotted line). But the market advanced an additional 50% during the subsequent four years, a bull market punctuated by reactions of less than 10% in the averages during that time.

So what can we conclude about the future course of the averages from the current level of bullish sentiment among investment newsletters? Not a thing! At worst it suggests that a reaction of perhaps 10% or so is likely to develop within the next few weeks. But even that is not a forecast that can be written in stone.

What matters most for the market's longer term direction is that the general public still hates stocks and is pessimistic about the economy. Until that gloom lifts this bull market will continue.

Big Ben

Ben Bernanke, the chairman of the U.S. Federal Reserve, is Time magazine's 2009 person of the year. I have been thinking about the significance of this cover. Here are my conclusions.

First, I think that this marks the high point of the public awareness of Bernanke's economic role in the U.S. and world economy. If I'm right about this there will be no more financial or economic crises that require the Fed's emergency intervention for the foreseeable future, i.e. for the next several years. This means that the March 2009 low is in all likelihood a once-in-a-generation low point for stock prices.

It also means that interest rates are about to return to more normal levels, levels which reflect expectations for average economic growth and growing employment in the U.S. and the world. In particular, the gap between short term rates and the 10 year note yield should start to shrink significantly and the yield curve should start to flatten a great deal.

Finally, since interest rates are likely to rise in the U.S. and since the Fed is likely to scale back its support for the securities markets, I think the U.S. dollar is likely to begin a long and extended bull market, one which will carry the dollar index to the 100 level. In this connection I would bring your attention to the background for the cover image of Bernanke you see above. It is an image of the U.S one dollar bill with Bernanke's picture in place of George Washington's.

Sell your villa on the Riviera and buy one in Palm Springs!

A few more bricks for the Wall Of Worry

Here are three recent items from the news media that show the Wall Of Worry on Wall Street is still getting higher. The top image is the latest cover of Newsweek. The story is by Niall Ferguson, a very talented historian, author, and financial journalist. Over the past year he has also found a big audience among doom and gloomers. The thrust of his Newsweek story is that the U.S. budget deficits, current and projected, and the resulting projected increase in the Federal debt are unsustainable. He offers no solutions, but does assert that the U.S. in well along the road to disaster. Why similar disasters won't afflict the rest of the world he doesn't say.

The middle item is a chart from Floyd Norris' New York Times column this past Saturday. It is a chart of one of the major surveys of consumer confidence. You can see that it has reached the lowest level seen during the past 30 years.

Right above this post is the front page of the Chicago Tribune's business section of November 25. The headline speaks for itself.

As you know I think the U.S. stock market is in the middle of a bull market which I expect will last through the end of 2010. By that time I expect to the the S&P 500 close to its 2007 high of 1576. The articles and images above reinforce my view that public sentiment is still quite bearish, despite a 60% advance in the market averages during the past 9 months. While a drop of 5-10% in the S&P can occur at any time, I think it would present another buying opportunity for the contrarian investor.

A review of my book

Here is a very kind review of my book by someone I don't know and have never met. You can check out the rest of the Amazon reviews by clicking on this link.


~~~~~~~~~~~~~~~~~~~~~~~~~

1 of 1 people found the following review helpful:

A Grateful Reader, November 12, 2009

By	Trading Truth Seeker "K" (Wesley Chapel, FL) - See all my reviews

Back in 1990 I read an article in the July/Aug issue of the Commodity Traders Consumer Report(CTCR)that forever turned my trading mindset around. Carl Futia wrote the article. And no, I don't personally know Mr. Futia, and I have no interests financial or otherwise in his world. But in my 25 years of trading, I can honestly say that this article helped to shape my trading mindset forever. To make a long story short, I'll quote and explain to you the two concepts from that 1990 article that engendered the changes in my trading mind.

Concept #1: Quote: "I had seen clearly that if I relied on oscillators and trend-following techniques, I was always getting into the trend too late. It struck me that I should try to "Anticipate" the beginning of trends rather than waiting to enter in the middle after they had started".

Concept #2: This concept was the idea of "Free Exposure" which Mr. Futia was taught from a seminar by the legendary trader Peter J. Steidlmayer. In essence Free Exposure meant; To enter the market where the risk is the least and the reward is the greatest, one must find, and be able to read where "Value" lies in the market. All entries made at "Value" are essentially tantamount to a "Free" ride in the market, with very little risk "Exposure".

These two concepts started me on my mental journey into what I now call "Anticipating Value" in the market. In any case, back then, after doing months of research and extensive reading on these two concepts my trading was completely turned around for the better. Today, both concepts have melded in one technique, and now form the foundational element of my trading strategy and methodology. Further, since reading this new book, I can see that most of his ideas have since matured into a cohesive philosophy, worthy of anyone's personal library. And by the way, my personal library once numbered over 800 books, so I believe I know a good one when I see it.

Thankfully, I too arrived at some of those same conclusions in his book a long time ago. This is because they were the natural and logical progression from his initial concepts in the 90's. Do yourself a favor and at least read this book, even though you may not agree with it now. Some time in the future, after you have been "sorely tested" in the market for a while, you may be truly thankful that you did. It might just spark a new way of looking at the market for you.

More bearish than at 866

Here is a chart showing the weekly sentiment survey conducted by the American Association of Individual Investors (chart courtesy of DecisionPoint.com). The red bars represent the percentage of responses that were bearish, the green bars represent the bullish percentage, while the purple bars at the bottom express the ratio of bulls to bears.

Notice that the bearish percentage is currently higher than it was at the July low of 866 while the bull/bear ratio is lower than it was then. This is one piece of evidence that makes me think the November 2 low is comparable in importance to the July 8 low. If I am right about this then the market has probably started a rally that will carry well past the 1120 level I have been mentioning. How far past 1120? The most optimistic projection would be to the 1240 level. This would put the next top as far above the 1099 top as the 1099 top was above the June 2009 top of 957. Cutting that 140 point difference in half still projects to 1170.

Main Street Hates Wall Street

At the top of this post is an image of the cover of the current issue of Time Magazine. The sentiment it conveys should be no surprise. But ask yourself: is it likely that stock prices will begin a new bear market and drop substantially from current levels when the public hates Wall Street and the stock market so much?

The Newseek cover you see above is from the March 30, 2009 issue. On that date the S&P was trading near 780 versus its current level of 1080. While I don't expect another 300 point rally from here over the next six months, I do think that the still bearish condition of investor sentiment is telling us that the trend during that time, and through all of 2010, will be upward.

Gloom and Boom

Here are a pair of images (top one from the Chicago Tribune and the bottom one from inside the latest issue of Newsweek) which I think captures well the public's mood about the economy and the stock market. The images speak for themselves. This is not a psychological environment in which any significant (say more than 10%) drop in stock prices is likely, or even possible.