Bull Market Will Survive the Weak Economy

12/03/2009 9:00 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says that economic reports have been weak, but poor investor sentiment is a strong contrarian indicator that the market can keep rising.

Investors and economists have been searching for signs that the worst recession to hit the US has truly ended and the economy is on track for a sustainable recovery. Recent reports, though, have been mixed and interpretation muddied by the government’s stimulus efforts.

The revised reading of the third-quarter gross domestic product (GDP) showed a 2.8% annualized rate of growth, compared to the initial reading of 3.5%. Despite the revision downward, it was still the first positive GDP report after a record four straight-losing quarters.

But it does suggest that recovery could be bumpy, with analysts predicting another modest growth rate for the current quarter and a decline in the first quarter of 2010. Analysts cite the 26-year high unemployment rate of 10.2% and reluctance [by] consumers to spend as the primary obstacles for sustained economic growth.

The Conference Board said its consumer confidence index increased to 49.5 from 48.7 in
October. While the number was better than the 47.5 economists were expecting, the index remains at historically low levels. Typically, a reading above 90 indicates a solid economy, and above 100 reflects strong growth.

[Nonetheless,] we expect the bull market to prevail. As we have said many times over the years, the stock market does not follow conventional wisdom, and that is certainly not the case now. Despite huge deficits, historically high unemployment, a housing collapse, a plummeting US dollar, and a banking crisis, the market simply refuses to buckle.

The rally off the March lows has been suspect in the eyes of the investing public right from the beginning, and it remains so at the present time. Markets usually hit a peak when investor optimism is at its greatest, and the current environment is nowhere near these levels, which is a big plus for the bullish case.

The bull market will not end until the public comes on board. Currently the public is moving in the opposite direction. For the year to date, $4.6 billion has been pulled out of conventional mutual funds that only buy US stocks, while the coffers of bond funds have increased by $280 billion.

Much like generals who are always fighting the last war, the majority of investors do not want to get blindsided like they were last year. That’s the main reason why bear market funds and long-short mutual funds (formulated to protect against major losses in bear markets) have raked in a record-breaking $10 billion through the first ten months of this year, which is double the previous record set in 2006. Very few investors seem to have any faith in this bull market, and judging by the way the money is moving, it appears that the majority feel that the rally is over.

We’re betting that they are wrong. This is a classic contrary opinion play. Remain fully invested.

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