After end-of-the-world swine flu hysteria momentarily transfixed investors, sentiment appears to be shifting. The pundits are back out in droves – many predicting a robust comeback for stocks or, at the very least, peddling the “green shoots” botanical analogy that we’re already heartily sick of.
Even Marc “Dr Doom” Faber, in his latest monthly newsletter to clients, concedes that perhaps, just perhaps, the S&P500 has bottomed out and things may improve from here. Not only that — after boosting gold consistently for months, he warns that precious metal prices may correct further on the downside in coming months.
One can never expect Faber to be totally optimistic (it would ruin his reputation), so he tempers this benign view with the soothing remark: “Rest assured dear readers: economic, financial, pandemic, and increasingly social and geopolitical problems are plentiful and won’t disappear anytime soon”:
If the swine flu becomes a serious problem (as I believe it will), then obviously it will be another nail in the coffin of the global economy. I hate to think about what will happen when the Swine flu reaches Africa and countries like India and China where intensive animal husbandry methods place swine and poultry close to humans and where sanitary conditions, poverty and a poor health infrastructure will be an extremely fertile ground for the swine flu virus (also further mutations).
Just to throw in another out-of-field problem for investor sentiment, Faber adds that another key problem could emerge from Afghanistan, and neighbouring Pakistan – which, he reminds us, possesses nuclear weapons. But, as he notes from the recent string of bleak US data, the stock market “will usually respond with an upturn long before the ‘news’ turns positive”:
I suppose the key for a low is that the news becomes less bad than was expected, which was the case in the US since March 6, 2009 when the S&P 500 bottomed out at 666…
Why this might be an important low in Faber’s view is that the “market’s advance has been broadening and that more and more groups such as airlines, homebuilders and cyclicals like Dow Chemical, International Paper and Alcoa are showing signs of having bottomed out”.
For this and other reasons, however, Faber advises investors to “avoid Treasury bonds and short them on any rebound”.
Pestilence and nuclear Armageddon aside, market watchers overall appear to be moving out of their bear phase. As SmartMoney notes:
After a week dominated by swine flu fears, corporate earnings, Chrysler’s bankruptcy and debate about the government stress tests’ likely effects on wobbly banks, our pundits’ views on recovery were no firmer, but neither were they weaker.
So-called green shoots — lower jobless claims, increased consumer confidence, a lower-than-expected drop in first-quarter corporate profits and the 9.4% April rise of the S&P 500 index (its best showing since March 2000) — are starting to add up. However, a debate still rages on about whether those are genuine positive market signals or blips that will give way to more bad news next week.
Traders’ Narrative, however, warns in an earlier post on market sentiment:
You know the old Wall St. adage, “Sell in May and go away”. Well, here we are. We have now officially entered the time period which has historically been most difficult for the stock market.
So far we’ve had a tremendous rally off the March lows: the S&P 500 index gained 28.4% and for the two months of March and April, it has risen 25% with most of it coming from March. April’s gain was 8.2%
Looking at market cycles, this is rare. To see such a similar strong performance for the months of March and April we would have to go back to the 1930′s where intense bear market rallies were the norm. In those times, it wasn’t a good time to put fresh money to work (hence the label of bear market rallies and the annual cyclical nature of returns).
SmartMoney’s “naysayers” include Morgan Keegan economist Donald Ratajczak, who warned on April 27 that the emergence of a few green blades of grass only means “the lawn is dying at a slower rate”, notes SmartMoney, adding: “And then there are the market watchers who are just sick of all the prognostications — and the metaphors that come with them”.
ISI Group founder Ed Hyman sums it up with his line in an April 27 report: “This is getting old and tedious”. Unfortunately for Hyman - and for us – the clichés probably won’t end any time soon – not least because whether you believe in swine flu or not, global hype over the outbreak has probably temporarily derailed a recovery.
What’s remarkable, as SmartMoney notes, is how the Dow shook off last week’s bad news to heard for its sixth out of seven positive weeks. But according to Ed Yardeni, founder of Yardeni Research, and Thomas Lee, US strategist at JPMorgan, a bull market isn’t in the offing – yet.
In the absence of a fresh catastrophe, markets will remain range-bound, according to Yardeni, whose top forecast has the S&P hitting 1000. Lee, in a Wednesday note on the business cycle, cautioned that smart investors should use history as a guide and predicted that the next few weeks could shed light on how and when recovery arrives.
As we’ve seen in nearly every recession’s bottoming process, we could be headed for a “W” shaped recovery that includes another market tumble, he warns:
“In other words, the current rally still falls within what would be regarded as the initial move prior to a retest,” he says. “A rally past the first week of May would force us to reconsider this view, as it would suggest a ‘V’ bottom is more likely.”
In its latest post, however, Traders’ Narrative points to a supposed “tsunami of cash just waiting to be invested”. Just don’t get too excited:A build up of cash is normal in a bear market but before we can transition to a bull market it needs to be put to work. As people become convinced that the worst is behind us, they start to take more risk and begin to put their cash into the market. So unfortunately, just noticing a massive pile of cash doesn’t really help us unless we can somehow pinpoint when and with what intensity this billowing mass of liquidity will start to be invested in the stock market.But to give you an idea of the sheer monstrosity of the potential tsunami of cash, consider this: it currently represents 50% of S&P 500 total capitalization. Needless to say, that is jaw dropping. As it is put to work, even in a trickle, it will put an impregnable floor on almost all equity indices and then drive prices higher. When that may be, can not be determined by this metric itself but by other technical, monetary and sentiment measures.
As for recent US stock rallies: here’s a word from Merrill’s chief economist David Rosenberg (no link), courtesy of Option Armageddon:
You know it’s a low quality rally when the top 50 most heavily shorted stocks are the ones that outperform the most — up 28% in April, an 1,860 basis point spread over the broad equity market.
We reckon, though, that the last word on “green shoot ennui” should go to NihonCassandra, in her latest post on Financial Gitmo:So hearing Mobius, Cohen, and other pundits speak of bull-markets and greenshoots is predictable. But I reckon that Mssrs Schilling,and Roubini, will in time – once again – more likely be correct insofar as I believe continued recession and mild deflation will predominate longer than optimists (and inflationists)- and in particularly longs, can bear once the shorts have sufficiently covered and the intermediate term optimism rolls over with the continued bleak news flow. Then, the trend-followers will mechanically bail, and reverse positions, prescient programmes and specs, too, will re-establish their shorts, until finally the squeezed-in will, once again get squeezed-out, and those amongst us with weak constitutions will be forced to hide the pills and sharp objects to avoid …. tragedy.