Longtime Bear Stops Growling
04/23/2009 1:20 pm EST
By Howard R. Gold
How far we've come from the despair that dominated the markets in early March!
Since the Dow Jones Industrial Average and Standard & Poor's 500 index hit their lows around then, the indexes have rallied as much as 31%.
And as spring's buds and flowers start sprouting on trees, we've heard talk about "green shoots" and "glimmers of hope" as optimism about markets and the economy takes root.
So, it's not surprising there have been changes of heart by some of the most prominent bears-people like Doug Kass of Seabreeze Partners and Steve Leuthold of the Leuthold Group-who have both warmed to stocks in recent months.
Last week, they were joined by a technician who has one of the best track records in the business. Dan Sullivan, editor of The Chartist, an advisory service that's celebrating its 40th anniversary this year, moved on April 14th from 100% cash in his fund portfolio to a 50% recommended exposure to exchange traded funds (ETFs) or equity mutual funds.
Sullivan has been all in cash since January 2008, saving his subscribers from one of the worst bear markets in history. And his mutual fund letter was number one in the Hulbert Financial Digest's rankings of fund letters' performance over the last five years, while The Chartist itself is in the top five of all letters over the past 25 years. Both beat the market during those periods.
So, when he changes his mind, it's worth paying attention-though I'm not quite ready to declare that we've turned a corner.
When I caught up with Sullivan a few weeks ago for a column I wrote during the first week of the rally, he was still skeptical, although he expected to see a market bottom or new buy signal in the months ahead.
But now he's putting at least one foot back in the water. Why? A key technical indicator, the advance/decline ratio, has given its first decisive buy signal since February 1991.
The advance/decline ratio, Sullivan explains, is a ten-day average of the number of advancing stocks divided by the number of declining stocks on the New York Stock Exchange. Whenever advances topped declines by two to one, he says, the stock market has done significantly better in the months ahead.
In the 11 times that's happened since 1949, the Dow averaged 7.68% gains over the next three months, a 15.3% advance over the next six months, and a 19.12% rise over the next 12 months (see table). The smallest gain six months later was about 6%, and only once-in 1987-did it decline 12 months out. And we all know what happened that year.
"It's rare and gives a powerful buy signal over the next three to six months," he told me Thursday morning.
But is it the beginning of a new bull? "It could be," he says, although his longer-term indicators haven't kicked in yet.
"We're still quite cautious," he emphasizes. "Eventually we want to be 100% in a group of high-relative-strength stocks."
But for now, he says, "we want to be in this market to a limited extent."
Some other advisors also have gotten more optimistic.
Lawrence G. McMillan, president of McMillan Analysis Corp., was pretty bearish when I spoke with him in March. But now he likes what he sees. "The equity-only put-call ratios continue to decline rapidly, and that is bullish," he writes in his newsletter, the Option Strategist. (That is the ratio of bearish to bullish options traders.) "Could this.be signaling the start of the next bull market? It's certainly within reason to draw that conclusion."
He says the S&P has to stay above 780 for the bullish trend to continue.
James Stack, president of Stack Financial Management, also was a cautious bear who has grown increasingly bullish. "Bottom line, our confidence in this market is growing.albeit slowly, but still growing," he writes in his InvesTech Research newsletter. "The fundamental blocks are already in place for a market bottom, and the technical blocks seem to be following."
He, too, has been quietly whittling down his ample cash position and making selective recommendations of stocks and mutual funds.
And noted technician John Bollinger-who remained bullish as the bear market developed-wrote recently, "There seems to be little purpose to questioning whether we have a bottom in place; the answer seems so obviously yes."
Not everyone is joining the bullish stampede. Chart watcher Sandy Jadeja, chief market strategist and head of global training for ODL Securities Ltd in London, is another longtime bear we interviewed in March. He's standing his ground.
In an e-mail, he told me: "The warning is that this is a bear market rally as the monthly trend remains bearish unless 9100 is taken out by the end of April."
But even if the rally goes beyond that, he doesn't think it will last: He sees a sharp sell-off next year and an ultimate low-perhaps in the mid-5000 area for the Dow-in 2012-2013.
And highly rated market timer Mark Leibovit, chief market strategist for VRTrader.com, wrote Thursday:
"The way this rally has unfolded, it really has the look of a 'one and done.' There have been no healthy corrections, and anyone who has wanted to participate has had to chase this market higher. Those that got to the party late could feel some pain over the next few weeks."
I'm no technician, but I have to agree.
Everybody's getting a bit carried away by some signs that that things are "less worse" than we had thought a few weeks back. And indeed, the rate of decline does appear to be slowing.
But jobless claims are still high, housing prices are likely to fall more, and the consumer is still cautious if a bit less penurious than after the turn of the year.
The big issues for me, however, remain the financial system and the global economy.
On that score, the International Monetary Fund (IMF) just issued two gloomy forecasts: that financial institutions ultimately could write down $4.1 trillion in bad loans and that the world's gross domestic product (GDP) will fall 1.3% this year in what the IMF called "by far the deepest global recession since the Great Depression." And it predicts a tepid recovery at best next year.
I'm looking for several years of subpar economic growth and markets that don't do much for a while. So, I seriously doubt spring's promise will become summer's plenty.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and not necessarily the views of MoneyShow.