June 23rd, 2009

Confused? Reading the Poll Results

I’m amazed at how short the memory is of market participants. It wasn’t much more than three or four weeks ago that about all you heard was have the economy “worsening, but at a slower rate”, “green shoots”, the need for a long-overdue correction and all the sidelines money waiting to be put to work:

  • “We’ll get a correction somewhere but it won’t happen when everyone is looking for it … there are a lot of institutional investors who are sitting on too much cash right now.” He expects the correction to happen in the summer, but markets won’t test the March lows. Markets are “forecasting the end of a recession, they’re looking through the trough and we’re getting a little concerned because we’ve run up here pretty quickly and we’re seeing data consistent with that…So the wall of worry is still there.” (June 12)
  • “U.S. stocks erased a decline yesterday after (Paul) Krugman said the economy will probably emerge from the recession by September. Recent reports showing smaller declines in housing and manufacturing and fewer job losses have reinforced forecasts that the slump may end this year. The ‘oh-my-God-the-world-is-ending’ phase of the economic downturn is over, and financial markets are stabilizing.” (June 9)
  • “All of this makes me think we have gotten ahead of ourselves in the stock market. There is an ocean of cash on the sidelines earning close to nothing, and the thought is that will power stock prices. It might, but investor caution is more etched into our psyche, and we are overdue for a bit of a correction. Significant rallies usually have had a one-third correction of the advance, and that would be healthy.” (June 5)
  • “Today was looking like a fairly quiet day with no solid direction, but the green shoots crowd got some actual good news on the jobs front. This was the first report since one in January where the massive army of continuing jobless claims actually fell. We also saw a positive report showing positive CEO Sentiment again for the month of May.” (June 4)

Yesterday, however, it was as if none of that happened or mattered as dire forecasts were trotted out by the news media putting the market into a tailspin:

  • “While the markets has priced in a fast V-shaped recovery, Roubini sees poor earnings prospects at companies and expects many companies to surprises on the downside. With such poor prospects, he believes ‘there’s going to be a significant market correction for equities, for commodities and even for credit.’….He also sees ‘more yellow weeds than green shoots.’ … Even when the economy recovers, he says, it will be very weak because of the debt overhang in so many sectors, as well as the large budget deficits governments have taken on to stimulate their economies.”
  • “The World Bank is slashing its forecast for global economic growth this year. …Expect the world economy to start growing again in the second half of this year, albeit at a pace that’s ‘much more subdued than might normally be the case,’ the World Bank said. ‘The global recession has deepened,’ the group said in its report. World Bank economists’ outlook is much gloomier than it was just a few months ago….international trade will likely see its sharpest decline since World War II, further hurting export-dependent developing economies.”

Both stories were contrasted with less sanguine views: George Soros claiming a favorable turn in the world’s economies during a Polish television interview and the the International Monetary Fund, the other big finance organization backed by world governments, which slightly raised their expectations for U.S. economy growth and its outlook for global economic growth next year.

I think of the stock market as an on-going opinion poll and see myself as reading polling results. As a good pollster, I can’t predict the future outcome but I can try to continually measure and read (through charts) the attitudes and opinions of millions of investors to determine which side is winning (buyers/demand or sellers/supply). That’s important because when momentum/power flips, it stays in place for a time.

Why all the confusion and contradiction? Who knows but as the saying goes, “that’s what makes a market”. Can the economy turn on a dime? Can it look like the market was beginning to heal a couple of weeks ago and commentators now be asking whether we will be testing the March lows and perhaps breaking below them? Has a fundamental sea change occurred?

As readers here know, yesterday’s action wasn’t a surprise (“we’re not seeing the bears come out of hiding to sell to unwitting buyers; we’re seeing bulls pulling back and being unwilling to buy at these prices” from June 13). If fact, a correction is expected and welcomed. You often read here (see May 6) about the “right shoulder” needed to complete the inverse head-and-shoulder reversal pattern, the finale of this Financial Crises Bear Market Crash. Crossing above 200-day moving averages, Coppock Curves and Regression to the Mean were fine but the final confirmation was the Market’s crossing above a key trendline, the neckline to the inverse head-and-shoulder.

We do have a game plan, a strategy that seems to be now even more strongly confirmed. We’re not floundering between the buyers and sellers. We have been expecting the pullback and look forward to the time that we can begin buying stocks hand-over-fist as momentum clearly flips back to the demand contingent (and this time it should be with a vengeance). Here’s that chart of May 6 again depicting what it might look like and when we could get there:

The pullback could take us to 800-810 (or 14%). I see the next try at crossing the neckline could be around Labor Day.

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