Flipping The Bullish Switch

6/8/2009


What a difference a rally makes.

According to Investors Intelligence, the percentage of bullish investment advisers at the March lows was just 26%, versus 47% bears.

Today, three months later and 2,200 points higher on the Dow, those numbers have almost flipped, with the percentage of bullish advisers now 43%, versus 25% bears.

Have advisers become more bullish simply in response to the increased altitude from the March lows? It sure seems that way. Yes, some advisers proffer specific reasons for their newfound bullishness. For example, corporate insiders had been selling at a feverish clip in April. However, Argus Vickers Weekly Insider reports insider trends have made a dramatic turn in the last few weeks and have moved into bullish territory. This about-face by insiders, at least for now, removes one of the bears’ more popular talking points.

Bulls also cite the market’s resiliency in the face of such seemingly bad news as the Chrysler and General Motors bankruptcies as a reason to buy.

Still, when sifting through advisers’ bullish arguments, we can’t help but feel that many of the rationales presented are merely subterfuge. It seems likely that the real reason advisers are jumping on the bullish bandwagon is the fear of missing out on the next bull market. Unfortunately, if markets move on fear and greed, the fear of missing out on rallies might be the deadliest combination of those two emotions.

Some 32% of advisers are in the “correction” camp, believing that the swift rally since March 9 will give way to a near-term pullback. However, many of these advisers sound more like bulls than bears when assessing the market’s intermediate- or long-term outlook. “Most major market recoveries see periodic pullbacks of 7 to 10 percent on the way to greater gains,” according to Personal Finance. “This rally will prove no different; but the pullbacks are buying opportunities.”

Another adviser advocating the buy-on-dips approach is The Primary Trend. “Profit-taking will revisit Wall Street as bad news surfaces and fear overwhelms investors again, but seize any price decline as an opportunity to buy. Don’t fight the Fed. Don’t fight the tape. ‘Sell in May and go away’ should be put on the back burner for now.”

Still, the difference of more than 17% between the bulls and bears is nearing what Investors Intelligence regards as risky territory. The newsletter considers it a danger signal when bullish advisers outnumber bearish advisers by 20 percentage points. The last time the spread topped 20% was the end of 2007, just before the horrendous market performance of 2008. The market’s rally is causing some more cautious advisers to consider taking profits.

The Value Line Investment Survey views the rally as an opportunity to trim equity exposure. “Our sense is that equities . . . no doubt turned upwards on hopes an economic recovery would commence during the year’s second half. Recent reports suggest such a business comeback, while possible, is not yet certain. The equity market’s impressive recovery . . . has left stocks quite vulnerable should the timetable for a business upturn be delayed. The recent reduction in our recommended investment position suggests the need for more caution at this time.”

The Forecasts has seen nothing to sway us from classifying the recent move as a rally within a primary bear market. True, all first legs of bull markets begin as bear-market rallies, and this rally may ultimately be viewed as the beginning of a new secular bull market.

But the Forecasts prefers to let the market tell the tale: A correction that doesn’t take out both of the March 9 lows followed by a rally to new highs in the Dow Industrials and Dow Transports would move the Dow Theory to the bullish camp.


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