Lots of Bulls, Few Bears
Al Frank Asset Management
By John Buckingham
January 9, 2012
With apologies to Beauty and the Beast, it’s a Tale as Old as Time: The market goes down and investors become bearish, the market goes up and they become bullish. Seems like folks will one day wise up as buying stocks on sale should make shoppers more excited than waiting to pick them up after they’ve advanced, but this is evidently not the time to break the spell.
Consider that after the S&P 500 Index quickly shed 100 points (or about 7%) the first week of August 2011, the number of investors in the weekly Bull/Bear Survey from the American Association of Individual Investors (AAII) who said they were bearish on the prospects for equities over the ensuing six months soared to 50%. This was the worst reading on that gauge since the market bottomed in August 2010. Imagine that! And the tally of Bears hit 48% in late September 2011, before the double-digit percentage rally in the fourth quarter got underway.
Though the Holidays seem to bring out a little extra optimism, the latest AAII numbers for the period ended January 4, 2012, show that 49% of respondents are expecting stock prices to climb over the next six months while only 17% are expecting them to fall. From a contrarian standpoint, this is not what we like to see, even as the turn of the year period both last year and the year prior saw an abundance of seasonal bullishness, while dollars ($4 billion in the latest report from Investment Company Institute for the week ending December 28, 2011) continue to flee domestic equity mutual funds for the perceived safety of bonds funds.
To be sure, there are some solid reasons to be looking favorably at stocks as 2012 is off to a nice start with the broad-based Russell 3000 index gaining 1.7% over the first four trading days. Many believe that as the first five trading days in January go, so goes the year, which is sort of true, at least according to numbers crunched by Mark Hulbert dating all the way back to 1896. The newsletter tracker penned a column a year ago that showed that when the Dow Jones Industrial Average rose over the first five trading sessions of the year, the index went on to post a gain from that point forward until the end of each year 69% of the time with an average gain of 7%. If the Dow fell, the index went on to decline 58% of the time, though stocks still managed to advance by 6.2% on average over the balance of those years. Interestingly, stocks rose in price 65% of the time, regardless of what happened the first five days, with the gain over those final 51 weeks of the year averaging 6.7%!
Though weakness in the euro currency due in part to fears about the health of Hungary and the European Commission's economic sentiment indicator falling in December for a tenth-straight month to its lowest point in more than a year kept many ‘risk-on, risk-off’ traders out of the market, U.S. economic data did its best to boost investor morale last week. As The New York Times put it, “Maybe it is time to start calling the glass half full. Employers in the United States added 200,000 jobs last month, the Labor Department said Friday, a report that came on the heels of a flurry of heartening economic news and signaled gathering momentum in the recovery. Consumer confidence lifted, factories stepped up production and small businesses showed signs of life. The nation’s unemployment rate fell to 8.5%, its lowest level in nearly three years.”
In addition to the better-than-expected monthly jobs report, the Labor Department reported that first-time claims for unemployment benefits fell by 15,000 in the latest week to 372,000, with the important four-week moving average dropping to 373,250, the lowest level since June 2008. Also, Automatic Data Processing said that private employers added 325,000 jobs in December, well above expectations. The payroll processing firm added, “December’s advance was the largest monthly gain since December 2010, reflecting strong job creation across most industries. Small and medium-sized businesses were hiring at a similar pace. Job creation among large employers was also encouraging.”
The important December 2011 Manufacturing Institute for Supply Management (ISM) Report on Business also topped expectations with the factory sector barometer (known as the PMI) increasing 1.2 percentage points to 53.9, the best level in six months. ISM said, “A PMI in excess of 42.5%, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 31st consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 29th consecutive month. The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (55.3%) corresponds to a 4.5% increase in real gross domestic product (GDP). In addition, if the PMI for December (53.9%) is annualized, it corresponds to a 4% increase in real GDP annually.”
Perhaps not surprisingly, the latest numbers prompted St. Louis Federal Reserve Bank President James Bullard to say this weekend: “I don’t think Quantitative Easing is very likely right now because the tone of the data has been very strong right now. We already have an easy policy, and the economy is improving, and so we can probably wait and see for now…I think forecasters are a bit too pessimistic about the U.S. economy. The recession has been over for a fair amount of time. It is a logical point in the recovery where you would expect somewhat more rapid growth and somewhat better jobs market, so we’ll see if that is what happens.”
While we do worry that the rally, albeit modest, in stocks heading into Q4 earnings reporting season, which kicks off this week, could succumb to a little selling (buy the rumor, sell the news), we remain upbeat in our view for the equity markets in 2012. Remember that we’ll be adding stocks to our four newsletter portfolios tomorrow morning, with those names disclosed in the January edition of The Prudent Speculator, which was posted to prudentspeculator.com last week
(c) AFAM
