Three Reasons Why The Stock Market is Doomed...
Stock-Markets / Stocks Bear Market Oct 07, 2009 - 08:01 PM GMT
It never ceases to amaze me. After the market turns – even a little bit, as it has the past couple weeks – there seem to be no shortage of I-told-you-so analysts pushing over each other to loudly proclaim on CNBC that we "may" have had a top and there "may" be a pullback, and hand you an umbrella for yesterday's rain. Few tasks prove easier than predicting a 5-10% pullback when 3-4% has already occurred.
I put my reputation on the line with every submission to our website, as I mentioned a couple of weeks ago when I said I was staying short, even as the market ran to its recent highs. Where are all the pundits who were screaming "buy" as we hit 1,080 in the S&P on September 23rd ? Well, they're not on television anymore. Convenient. Let me make something clear: I would rather make a prediction that isn't full of half-hearted possibilities and insanely vague "5-25%" directional estimates, and be wrong than have my readers confused on my position. If I'm wrong, I'll admit it, tell you why, and we can both learn from the events that transpired.
Peter Schiff is right
Well, mostly right, anyway. Let me explain.
Today I observed Melissa Lee hosting "Fast Money" on CNBC giving a sarcastic raised eyebrow followed by an eye-roll to Peter Schiff, who has been a rather frequent guest on the network since the market has climbed to recent highs.
Let me point out that Melissa Lee, a graduate of Harvard College, has been working in the financial markets for some time. However, somewhere in between teasing her hair back to 1987 and applying her makeup by stuffing Mary Kay products into a shotgun, she forgot the fact that she is a reporter and host, not a money managing expert. I don't care how many times Schiff has cried "wolf", she shouldn't be dismissing his opinions, especially when he's making sense.
Peter Schiff has been a bear for quite a while, although he suggested a rally coming on his March 8th blog, just before the actual low point. Oh, and he did it for real, he didn't just say he did 6 months later as most money managers have.
However, since around 8,000 in the Dow, he resurrected and has been maintaining his bear market perspective, citing poor fiscal practices (which few would argue with), high unemployment (among other poor economic data), and general state of denial from corporations and investors alike.
Today was no different, as Schiff continued to defend his position, claiming that our economy is using band-aids to perpetuate the same problems that have come to light in the past year. Although I did not agree with his bearish perspective when the Dow was approaching 8,000, I certainly agree with his current argument that the huge rally since March is a result of throwing cheap money into the markets to finance a false recovery. In other words, the government might as well have just bought trillions of dollars worth of US equities. With taxpayer money.
About that, he's dead on. He's also dead on, in my opinion, by choosing to invest in foreign currencies and selectively investing in foreign stocks. Although a weak dollar is happily pursued by our government at every opportunity and is inherently good for stock prices, it is not a great thing for the long-term health of our economy, and those who are paid in US dollars will eventually pay the price. Which, apparently, will be higher.
The only point on which I disagree with Schiff is the extent to which he believes an economic collapse will ensue. For example, Schiff claims that within the next few years, we'll see gold at $5000 per ounce. I am not quite sure that will occur. At least, I am hopeful that it will not.
Mutual Fund Cash Levels
Historically, when the levels of cash held by mutual funds reaches a certain level of surplus, it's a bullish sign (in other words, more money on the sidelines waiting to be invested). Conversely, when the levels reach a certain level of deficit, it's a bearish sign (as it would be evident that most available funds have already been invested).
At the recent low point in US equities in early March, mutual fund cash (adjusted for inflation) was at a 12-year high. Of course, this was followed by our most recent bull run of about 60%. However, the current levels are now in deficit. In fact, the last time they were this low was in October of 2007. That's right – the top.
Indicators such as these are not completely fail-safe, but they do provide a very interesting picture. Not to mention the 14-day RSI has fallen below 50 in the S&P and we're knocking on the door of the 50-day moving average.
There's also the common sense factor. If the market begins to look grim, those funds that have taken part in this rally are not about to lose what few clients they were able to maintain by riding stocks any lower than they have to. There's plenty of equity to sell.
Trigger-shy investors
Speaking of common-sense factors, regardless of the amount of fabricated, window-dressed, sugar-coated and misleading "positive" news that has crossed the headlines recently, the bottom line is that we're up 56% even after the most recent pullback (if you can call it that), and people still don't have jobs.
It is true that there are many retail investors who are trying to get in at this point (they're usually the last to do so, which should tell you something right there). However, there is a glaring difference between investors, both retail and institutional, who think the market will rise and those who believe the market will rise. I will elaborate:
Stocks go up because demand goes up. Actual demand. In other words: buy orders Investors and analysts can talk all they want about a bull market continuing, but unless they're putting their money where their mouths are, it's going to make no difference whatsoever. The only aspect that matters is those investors who are willing to press the "buy" button, even after we've come all this way. The question is... are people willing to put everything they may or may not have made back on the table once again with so much uncertainty about the future of the economy? My guess is no. Not with so much downside possible.
Final thoughts about the immediate future
Now, before I get carried away, I do believe this market is going higher – eventually. But I don't trade for eventually. I invest for eventually, because "eventually" could be 15 years. Therefore, I do have some small long positions, diversified in foreign and US equities, as well as – you better believe it – foreign currencies.
What I trade is a different story. I am still currently mostly short, as I mentioned in my last article, and I'm happy about the recent pullback. I'm about 70% convinced that the market will still go lower, and that today (and possibly tomorrow) we will have a little move to the upside in the meantime . I will be surprised if people do not begin to take their profits before the S&P hits 1,050, which will send us on another leg down. I will reiterate, however, that I am not looking for much below 1,000. Not because I think that will be a bottom, but rather because I just plain don't know what will happen after that. I need to see some more news and information, false and fabricated as it may be. But, bear in mind (no pun intended) that uncertainty, as it continues to permeate the markets, doesn't usually lead to purchases.
Good Investing,
John Whitehall
Analyst, Oxbury Research
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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