Let’s talk about sentiment.
Last week was the worst market week since March 2009. Similarly, the three-day decline from Wednesday through Friday was the worst three days since March 2009. The market is now officially in the red for 2010. And the persons we’ve identified as market props (Bernanke, Geithner, etc) are now beginning to come under intense fire for their actions.
In a word, the market has changed. I truly believe we are at the beginning of a seismic shift in the markets. I do not use the word “seismic” loosely. And everywhere we look, there are signs of a Market Top being formed. Just a few include:
? Rapidly dwindling volume
? Markets selling off on good news (Intel, etc)
? A key reversal week (the market breaks to a new high but closes at a loss)
? Massive insider selling
? And finally, rampant bullishness
Regarding that last point, in late 2007/ Early 2008: Barron’s interviewed 12 Wall Street strategists. ALL of them thought stocks would rise in 2008. The average forecast was a 10% gain.
The S&P 500 then promptly lost 37%.
Well, on Monday December 21, 2009, Barron’s did its usual annual survey. This time, they asked a dozen Wall Street analysts/ strategists how the market would fare in 2010. On average, they expect the S&P 500 to post a 12% gain. However, this time around, there were various caveats and their language was more hedged by “ifs, ands or buts.” This was evident in the fact that the forecasts for the S&P 500’s close at the end of 2010 ranged from 1120 to 1350.
Similarly, financial newsletter writers are currently MORE bullish than they’ve been since October 2007 (the absolute peak in stocks). Similarly, the American Association of Individual Investors survey shows only 23% of individual investors are bears, while 49% are bulls: an HIGHLY slanted view.
With this in mind, I think the collapse of the last three days is really just the beginning of something much, MUCH larger. As I said earlier, I believe we are at the beginning of a seismic shift in the markets. In bear market terms, I believe we’re at the beginning of “the next leg down.” Bear markets typically end when stocks trade at a P/E in the single digits and dividends yield 6-7%. In nominal terms, we’re talking about the S&P 500 trading in the low 00’s, possibly even as low as 200-300.
Now, we won’t get there at all once (barring some kind of systemic failure). The first wave of this bear market took eight years or 1.5 years to hit (depending on whether you count the inflation adjusted 2000 top or the nominal 2007 top in stocks as “THE” top for the bull market started in 1982).
However, I DO think 2010 could very easily repeat 2008’s performance in terms of losses. Why? Because as sentiment changes from bullish to bearish in the coming months, we’re also destroying one of THE primary market sentiment props of the last 20 years.
That prop is: that the Fed can fix/ save the market.
A lot of commentators talk about the Greenspan Put or Bernanke Put: the idea that both Fed Chairmen would do anything they could to keep the market up, thus putting a prop under the market.
However, the reality is that the market has operated under a more general “Fed Put” for at least 30 years (if not 80 years). This “put” was the mythos/ belief that the Fed COULD save the financial system if there was in fact a Crisis.
Well, since 2008, we’ve now seen the US Federal Reserve throw everything including the kitchen sink at the financial markets. It hasn’t really fixed anything, but it HAS kept the “Fed Put” mentality in tact. Thus sentiment has been allowed to return to 2007 levels of bullishness less than one year after everyone thought the financial world was ending.
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So what would happen if we suffered ANOTHER round of the Crisis? What would happen if the entire world found out that the Fed not only will not save the system but in fact COULD NOT EVEN IF IT WANTED TO. How would sentiment change as this illusion became disillusion?
These are questions EVERY investor should be asking him or herself right now. Sentiment takes a while to change, but once it changes to the bearish side of things, the effects can be VIOLENT. Case in point, the markets shaved off $500 billion in wealth in the last three days DESPITE near record bullishness.
Good Investing!
Graham Summers
