Bank stock strategists don't see any market shadows--groundhog predicts four more weeks of rally

02/02/2012 1:51 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I’ve been waiting to see how long these guys would hold out.

Turns out Groundhog Day is their limit.

And I think that gives us some help in figuring out how long the current rally is likely to run.

Chief economists and investment strategists at the biggest global banks went into 2012 with bearish calls for the first half of 2012. (As I did—and do.)

But after the MSCI All-Country World Index (ACWI) was up 5.7% for January and the U.S. Standard & Poor’s 500 Stock Index was up 4.5%, they’re reversing course. Now they’re calling for the rally to continue.

A good example is the comments from Thomas Lee, chief equity strategist at JPMorgan, in an interview with Bloomberg on January 31. “Investors had gotten just too bearishly positioned” at the end of 2011. “Investors need to go from defensive to cyclical exposure. That’s going to be something that takes time.”

There’s nothing wrong with changing your mind—especially when you have new data. (One of my favorite investing quotes comes from John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?”)

And forecasting markets and economies is tough work so I’m not making fun of these calls.

But I am interested in them as a measure of sentiment. Markets go up when money sitting on the sidelines changes its mind so the shift from bearish to bullish by big bank strategists is certainly a boost to the current rally. If bank strategists are now bullish when they were bearish, it’s a reason, in itself, to think that this rally will run for a while yet.

So when might it run out of steam?

I’m looking at February 29. (How’s that for precision?) That’s the date when the European Central Bank will hold its offering of three-year money for European banks. Estimates now, by Goldman Sachs, say that banks, after drawing down 489 billion euros from the central bank in December, are likely to draw down 1 trillion more at the end of this month.

Much of that money will go right back into the vaults at the European Central Bank since Europe’s banks are still too scared to do much lending or much buying in the financial markets.

But 1.5 trillion euros is a lot of safety net. And the markets right now seem increasingly willing to look past all the confusing economic news and the ups and downs of events from Greece in confidence that Europe’s banks have satisfied their financing needs through 2012 and a good way into 2013.

I wouldn’t get too bearish as long as the bank safety net is promising lower risk in global financial markets.

Come March 1, though, and the markets could well go back to a “What have you done for me lately?” attitude. How far they might swing toward fear after the safety-net optimism of January and February will depend on exactly where we are with a potential Greek default by March 20, on the rising odds of a Portuguese default/restructuring, and on the depth of the European recession.

I don’t think that means you can’t enjoy this rally—I try never to look a gift rally in the mouth—or that we’re going to see a 20% drop in March. But I think the sense that is creeping into the market that the bad days of high volatility are over is premature.

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