This market has shown impressive resilience, but with skeptics now jumping in, this is a high-risk time for new buying.
The Wall Street Journal’s Wednesday markets column said it all: “The higher it has climbed, the more skeptics it has attracted.” Last week started off with concerns that Greece would not make a deal with its creditors, and a sharp rise in Portugal’s bond yields only added to the pressure on stocks as of Monday’s opening.
Then on Tuesday, the economic data was disappointing and stocks opened weak but still held well above Monday’s lows. This was the “bad news” that I thought the market needed before it could move higher.
The financial media also quickly changed its tune, as one headline on Tuesday read “Poor Economic Data, Euro Stalling, Puts Recovery Rally on the Skids.” As I mentioned on Thursday, bullish sentiment of individual investors dropped 6% from the prior week. Many of the market averages came very close to initial support on Monday before finishing the week much higher.
Despite end-of-month selling, it was a great January, with the SPDR Diamonds Trust (DIA) up 5.5% and the Spyder Trust (SPY) up 7.05%. Of course, the real winners were the PowerShares QQQ Trust (QQQ), up 11.4%, and the iShares Russell 2000 Index Fund (IWM), up 12.3%.
On Wednesday, stocks were boosted by the much better numbers from the ISM on manufacturing, as the index hit its highest level in eight months. Manufacturing data was also positive in China and Germany. The Dow Industrials were up 157 points early Wednesday and the Dow futures were 255 points above Monday’s lows.
After Thursday’s mixed close, stocks accelerated to the upside on Friday after the non-farm payrolls report was much better than anyone expected. The chart shows a steady improvement over the past four months, which is starting to convince more that the recovery might be real.
This must be making life difficult for many Wall Street strategists. Savita Subramanian, Bank of America’s chief equity strategist, reported that her Wall Street equity sentiment indicator hit a two-year low in January. It is now close to giving a contrarian buy signal.
This is based on the average equity allocation recommended by Wall Street strategists. She said further, “When our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 93% of the time, with median 12-month returns of +23%.”
As I discuss in more detail later, I do not think this is the time to jump on the stock market bandwagon if you have been out for the past four months. The turnaround in early October was the time to buy, as the Advance/Decline (A/D) line had signaled a stock market bottom.