Make way for the bulls

6/9/2008


The bulls are back in town.

According to Investors Intelligence, the percentage of bullish newsletters rose to 44.8% on June 2, only slightly below the 2008 high of 47.3% reach in May but still well below the 62.0% reached in October.

Bearish sentiment is up slightly during over the last two weeks, but many of the advisers classified as bulls in the first half of May slipped into the “correction” category. They remain bullish over the long term but expect a market pullback in the near term. Such corrections are common within bull markets, as are such changes in sentiment. Advisers who fall into the correction camp see the recent declines as a buying opportunity.

“Stock markets climb a wall of worry,” says Market Trend Follower. “That is, they like to go up in the midst of bad news. And we certainly have seen some impressive potential price bottoms formed in the stock market during the recent credit crisis. We have the potential for a bull market in stock prices.”

While the credit markets remain troubled, some advisers say the worst is over. According to Past Present Futures, “Credit markets are becoming more liquid. Commercial-mortgage-backed securities and loans originated to fund LBOs (leveraged buyouts) are again salable.”

Problems still present
There’s enough bad news out there to keep the bears well fed. While the pace of layoffs has stopped accelerating, job cuts remain well above levels common a year ago. And the combination of falling home prices and rising food and gasoline prices has consumers skittish.

The Value Line Investment Survey warns, “Business prospects are uncertain . . . inflation is clearly on the rise, interest rates could be headed higher; earnings are under selective pressures; and valuations, while not excessive, are not low. We think an increasingly cautious approach to the stock market is warranted at this time.”

Federal Reserve Chairman Ben Bernanke describes the current financial markets as “far from normal,” and the Federal Open Market Committee expects gross domestic product to fall in the first half of 2008. But the Blue Chip Economic Indicators consensus projects a modest increase in GDP, and the percentage of analysts who believe the U.S. economy has either fallen into recession or will do so later this year has declined in recent months.

Despite gloomy comments from Federal Reserve officials in recent weeks, the Fed’s willingness to take a direct hand in the market — as evidenced by its part in the bailout of Bear Stearns — has increased some advisers’ confidence that regulators are willing to step in to avert other potential disasters.

Could be worse
Given the magnitude of the bad news regarding the credit and housing markets and consumer confidence, stocks have bounced impressively from March lows and did not lose much of those gains in May. Many advisers see the market’s avoidance of a sharper decline last month as a bullish sign, and several newsletters expect political winds to warm the stock market in the months ahead.

“The presidential election year is usually favorable for equities,” the Klein-Wolman Investment Letter says. “This year the White House and the Congress have decided to send $100 billion in government checks to households. These checks are already in the mail. The Federal Reserve, which does not watch or care about the election returns, has been keeping a heavy foot on the monetary policy accelerator. So again, if history is a guide, stock prices should have a firm floor under them. The bottom line is that the odds favor a proactive political environment that is favorable to the stock market.”

The temporary erosion in adviser sentiment is itself a bit of a bullish signal. Markets often top when the percentage of bullish advisers approaches 60%, and the percentage has not hit 50% this year, maxing out at 47.3% on May 20. Not even the most optimistic bulls expect smooth sailing over the next few weeks, but even a bumpy road can lead investors to a good place, as The Primary Trend projects: “While this kind of market environment will test investors’ patience and their stomachs, it will also eventually build a solid long-term foundation.”


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com