Is the public always wrong?This is probably the most frequently asked question about the Theory of Contrary Opinion. For a correct answer we need to change the words in the question. Let me put it this way: Is the public wrong all the time? The answer is decidedly, “No.” The public is perhaps right more of the time than not. In stock-market parlance, the public is right during the trends but wrong at both ends! One can assert that the public is usually wrong at junctures of events and at terminals of trends. So, to be cynical, you might say, “Yes, the public is always wrong when it pays to be right – but is far from wrong in the meantime.”... It is to be noted that the use of contrary opinions will frequently result in one’s being rather too far ahead of events. A contrary opinion will seldom “time” one’s conclusions accurately. The “time element” is the most elusive factor in economics. . . . Therefore, when we adopt a contrary opinion, as a guide, we must recognize that we may be too far ahead of the crowd. This is because economic trends often are very slow in turning, or reversing. Frequently, opinions on a given situation will be so one-sided that a contrary opinion is obvious. However, it may be some weeks, or months, before the trend of the situation alters sufficiently to make the contrary conclusion the correct one.It is probably safe to say, however, that it is wiser to be early than to be late-in most economic decisions. This does not apply only to the stock market. Not by any means. It applies as well to business policies and to other economic problems. In sum, the public is not wrong all the time-and a contrary opinion is usually ahead of time.... The Art of Contrary Thinking by Humphrey B. Neill
I used the last paragraph from the aforementioned quip as a quote in last Friday’s Morning Tack. This morning I had the space to include the entire quote. I suggest you read it, and then read it again, because its wisdom is just as relevant now as it was in 1954 when first published. Contrary thinking was just arriving on the Street of Dreams as a few pundits were starting to embrace the secular bull market thesis. Interestingly, that “secular bull” had begun amid disbelief on June 13, 1949 at a D-J Industrials’ price of 161.60, and it would extend until 1964, or 1966, depending on your interpretation of Dow Theory. Still, in 1954 most doubted a bull market was afoot even though we were already five years into it. If that sounds familiar, it should! By the end of 1954, the senior index had gained 151% (without the inclusion of dividends) from the 1949 “low,” yet few believed it would last. In 1954 the cold war was heating up with the launching of America’s, and the world’s, first atomic submarine. The Indochina war was in its final stages with the furious battle of Dien Bien Phu, while the communists were getting half of Vietnam in the Geneva truce agreement.
In 1955, the Dow trudged higher, despite two increases in margin account requirements, first to 60% and then to 70%. Not even President Eisenhower’s heart attack “stumbled stocks” for long, although most individuals continued to not believe in the “bull.” 1955 proved to be a consolidation year as Ford Motor came public, Elvis shocked the country, Egypt seized the Suez Canal, and Russian tanks rolled into Hungary. Likewise, 1956 was a year of consolidation, but McCarthyism erupted in 1957, and the U.S. was stunned by the launching of Russia’s Sputnik I, leading to a sell-off that would see the Dow suffer a 20% decline between July and October, which actually triggered a false Dow Theory “sell signal” like the false sell-signal we got in the “flash crash” of May 2010 (both such signals were quickly reversed with buy-signals). In January of 1958 the first U.S. satellite (Explorer I) was launched into orbit and margin requirements were raised to 90%. Yet, the stock market continued to grind higher with the Dow rising from ~437 to 584 (+33.6%) over the course of the year.
The years 1959, 1960 and 1961 were again consolidation years amid news events like Castro taking over Cuba, the U-2 plane incident (Gary Powers), the Bay of Pigs invasion, the East German wall, and U.S. troops arriving in Vietnam. That upside consolidation ended with President Kennedy’s “steel crisis” of 1962, where five steel companies (in aggregate) raised prices and the President bashed them. The result was nearly a 30% decline between April and June before the secular bull market resumed. Even President Kennedy’s assassination in late 1963, and the Chinese nuclear bomb explosion in October 1964, didn’t stop the “bull.” In 1965 Fed head William Machesney Martin warned that the economy was overheating and raised the Discount Rate, all to no avail, as in early 1966 the D-J Industrials crossed above 1000. The actual date was January 18, 1966, and it was only a peek-a-boo “look” above 1000 on an intraday basis. And, that was it! On February 9th, at a closing price of 995.15 the great secular “Bull Market” of 1949 to 1966 came to an end.
I have spent a lot of time this morning chronicling many of the negative events that occurred during the secular bull market of 1949 – 1966 to demonstrate that what we have been through since the March 2009 low is not much different than the first five years of the 1949 – 1966 secular bull market. If I had the time, I could do the same from the bear market low at Dow 41.22 of June 1932. Interestingly, like back in 1954, after five years into this bull move many folks still do not believe we can be in a bull market given all the current consternations. So I will say it again, for the 1000th time, “The equity markets do not care about the absolutes of good or bad, but only if things are getting better or worse.” I think things are getting better, and would note that while “easy money” has certainly helped, if next year’s earnings estimates are anywhere near the mark, earnings will have almost tripled since 2008. As a sidebar, my friend Brian Belski (BMO’s keen-sighted strategist) did a study based on the historical precedence that when stocks emerge from a very long sideways consolidation (1966 – 1982 or 2000 – 2013) they tend to be in a new secular bull market. Again, based on history, he concludes it is not unreasonable to assume there are 10 years left in this current “bull run,” with a price objective of more than 4200 on the SPX.
Now such “bullish ballyhoos” may sound foolish given last week’s action, but said action was not unanticipated on a near-term basis. I am not going to rehash the reasons for my caution since the S&P 500 (SPX/1925.15) traveled into my envisioned target zone of 1950 – 1975 during the first week of July. I am also going to admit that right now I have no clue as to if this is the 10% - 12% pullback the historical odds imply should occur sometime this year, although as of now it has the feel of it. To this point, I harken back to the July – August swoon of 2011 that lopped some 18% off of the SPX. When studying that decline on a daily/weekly basis, it looks pretty easy to trade it as a “waterfall decline” (see chart 1). On the other hand, when breaking it down on a 15-minutes trading basis (chart 2), it shows all of the counter-trend bounces that caused traders to attempt to “catch a falling knife,” something I caution against here. Hence, I continue to embrace the rarest commodity on Wall Street – patience!
The call for this week: The public is right much more than wrong. They do tend to be wrong at major inflection points like 2000 and 2009 (too bullish then too bearish), as Humphrey Neill states, “Yes, the public is always wrong when it pays to be right – but is far from wrong in the meantime.” As stated, “It is wiser to be early than to be late-in most economic decisions.” Speaking of being early, I am leaving early today for one of my favorite towns, Greenville, South Carolina. On Monday and Tuesday I will be seeing our advisors and presenting at events. Early Wednesday, I jet to NYC to see portfolio managers at institutional accounts like Baron Capital, JP Morgan, Goldman Sachs, etc. Of interest, Ron Baron owns a large position in Iridium (IRDM/$8.24/Strong Buy), a stock I own as well. Last week IRDM “inked” a very good earnings report and traded higher despite the stock market’s late-week carnage. For more details, please see our Satellite & Space analyst Chris Quilty’s company comment dated August 1, 2014. This morning the world’s markets are celebrating the $6.6 billion rescue of Portugal’s banking system, leaving the SPX futures better by more than 7 points. Alas, I wish it was just that simple ...