Energy-fueled sentiment spike may not last

9/8/2008


Judging by recent consumer and investor sentiment, confidence is tied to changes in energy prices. Amid declining gasoline prices, the August reading of the Conference Board Consumer Confidence Index showed the largest gain in two years — the second consecutive month of improvement after six months of declines. Still, August’s consumer-confidence reading is only about half what it was a year ago.

A similar pattern is playing out in adviser sentiment. According to Investors Intelligence, the percentage of bullish advisers rose in August to an 11-week high of 40.7% before falling slightly to 37.8% around month’s end. The bump in bullishness inversely tracked the movement of oil prices over the last two months. Still, despite the recent rise in bullish sentiment, the percentage of bullish advisers is down considerably from the 60.2% registered last October.

That consumers and advisers seem to be pinning their bullishness on the near-term direction of energy prices lends some fragility to their positions. Should energy prices spike again and financials continue to serve up unpleasant news, it will be interesting to see if adviser sentiment plumbs the lows reached in July. Some market watchers expect such an occurrence. “The stock market’s near-term reprieve from its long-term bear trend should end soon,” according to the Elliot Wave Financial Forecast. This adviser expects stocks to soon show their biggest declines of the bear market to date.

Another pessimistic theme is the notion that bear markets take down all market sectors, including areas that had previously held up during market declines. One former stalwart — international stocks — has performed poorly this year, lending support to the idea that the bear market is very much alive and providing no place to hide. “Stocks in many of the biggest international markets, as well as stocks in some of the hottest, emerging markets, have suffered a severe pullback,” says Doug Fabian’s Successful Investing. “It’s my opinion that the bloom is now off the rose that was international investing, and I’m not looking for that rose to bloom again for some time to come.”

Of course, the bulls aren’t without their themes. One is the tendency for stocks to rise in an election year. According to Bob Brinker’s Marketimer, in all 20 presidential election years since 1925, the stock market has either made progress or experienced only minor weakness during the period between the end of June and election day.

Bulls are also trying to gauge whether the market has had the final capitulation usually seen at major turning points. “We may have seen one (a selling climax) on July 15. Over 1,300 NYSE stocks hit 52-week lows that day,” according to Richard E. Band’s Profitable Investing. “July’s selling climax gives us reason to hang on.”


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