Fundamental researchers are asserting that at $100 per share in earnings, generating a price earnings multiple of 11.5, stocks are at the historical bottom of a 10-22 range. Q3 earnings are imminent, and will outperform on the upside, although not with the magnitude seen in recent quarters. Plus, QE3 is on the table, and the Federal Reserve may deliver a surprise at its upcoming September 20-21 meeting.
Furthermore, risk assets are about to enter a period of seasonal strength. If you “sell in May and go away”, you should then “return in September and buy.”
No, no, cry the technicians. The S&P 500 is in an ABC corrective pattern. Wave 4 is complete, and the beginning of wave 5 is imminent, crashing the market to new lows. This argument is most clearly elicited by my friend, Arthur Hill, at StockCharts.com in the space below. He sees a downside target of 1,025, the July 2010 low.
What is a befuddled individual investor to make of all this? My belief is that fundamentals always win out over the long term, and that technical cues are at best, a lagging indicator. I use technicals for guidelines on where to place orders on a short term basis. The longer you stretch out your time frame, the less relevant they become.
At best, technicals are right 50% of the time, right in the same league as a coin toss. How many technical analysis hedge funds are out there? None. They are all fundamentally driven.
Trend followers are technical traders. How are those left out John? Wow. He continues:
The same technicians making the incredibly bearish prognostications today were making equally convincing bullish arguments in July.
However, since we are descended from prehistoric hunter gatherers, we are all visually oriented. We respond to stimuli we can see much more rapidly than those we can conceive. A picture truly is worth 1,000 words. And probably a lot more. That’s why so many brokerage firms use them to sell research. I employ charts to back up my fundamental arguments because they are so easy to understand, definitely not the other way around.
So I think the fundamentals will eventually win out, and that we will get the autumn rally that I have been predicting. Exactly when will that happen? Don’t ask me. Go ask a technician.
Trend following is not fundamental trading. It is not predictive technical trading. Trend following is technical trading, but it reacts to market moves over trying to predict them. That is a massive distinction. Few seem to see that clearly.
Don’t get me wrong, I like Montier’s behavioral views on markets. There is, however, a better solution to tail risk and it rhymes with …bend wallowing.
April 5, 2011 — It’s time to clear the record and to make my current thoughts clear. Lowry’s was correct, and my PTI was correct all along. We’ve been in a primary bull market and we’re still in one. The costly and brutal decline from the 2007 high to the 2009 low was, in fact, an almost unprecedented correction in an ongoing bull market. The stock market panic-collapse was a direct result of the crash of the housing bubble. I mistakenly took the vicious decline of 2007 to 2009 as a turn in the tide and a bear market. At the March 2009 low, the (bull) market was extremely oversold. The relentless climb since the 2009 low (see chart below) was the result of a compressed bull market that was charging higher as it made up for lost time. It was like a rubber band that has been stretched too far and was snapping back to its original shape. But what of the situation now? The great bull move that started from the 2009 low is, at this point, probably near a state of exhaustion. The entire rise from the March 2009 low to the present has not yet undergone a full correction of the advance. The climb from the March 2009 low to the present added 5853 points to the Dow. The stock market now is heavily over-bought. Lowry’s Buying Power Index is off its high, and Lowry’s Selling Pressure Index is above its low. Thus, a correction should not be surprising. Considering that the Dow has gained 5853 points from its low, a one-third correction could take the Dow back to 10449. A 50% correction could take the Dow down to 9474.
Question — What should we do if the market does correct?
Answer — If the stock market corrects from the current area, I’d suggest buying the DIAs as near to the bottom of a correction as possible.
Question — Russell, why didn’t you advise buying the DIAs at or near the March 2009 decline lows?
Answer — I didn’t advise buying because I mistakenly thought the 2007 to 2009 decline was part of a major bear market. I was wrong. As it turned out, the decline was a deceptive and vicious correction within an ongoing bull market. As of now, the bull market is still in force. Therefore, any forthcoming correction should serve as a buying opportunity.
This is not trend following. I think Russell has many sage points to make, but after watching his comments for the last 2 or 3 years, enough for me. This is fundamental analysis wrapped in a so-called trend following wrapper. If I have seemed like a Russell follower over the last few years, I deserve criticism. I don’t read his stuff every day, but when this came across my desk, it was time to set the record straight.
Having lived through the financial crisis of 2007-08, the man in the street might find the idea that markets are “efficient” incredible. But the efficient-market hypothesis, like a Hollywood monster, has proved very hard to kill off. From the truism that the average investor could not beat the market after costs, academics developed the insight that obvious market-beating opportunities would quickly be arbitraged away.
Here is a great example of efficient markets — not:
That chart could only have been effectively traded as a trend following trader. You used fundamentals to trade that? You are full of it or you were flipping coins and hit heads.
“There are many, many things that Google could do, that we chose not to do.”
He added:
“One day we had a conversation where we figured we could just try to predict the stock market. And then we decided it was illegal. So we stopped doing that.”
Google is a great search engine. It won the title of search king and Schmidt has made a fortune. Congratulations. However, when he says stuff like this it makes everyone with a pulse think he was just a lucky idiot.
Stephen Bernard, AP Business Writer, writes today:
“NEW YORK (AP) — Stocks tumbled Thursday after two disappointing economic reports renewed investors’ concerns about the pace of a recovery. The Dow Jones industrial average fell about 165 points in afternoon trading. Broader indexes also fell by more than 1.5 percent. Interest rates also fell sharply as investors flocked to the safety of Treasury bonds. The Labor Department said claims for unemployment benefits rose unexpectedly last week and the Federal Reserve of Philadelphia said manufacturing activity in the mid-Atlantic region has dropped during August.”
Sounds like a simple report from the AP, right? Nonsense. Think about the two words bolded.
Let’s be frank: Anyone giving a view to a significant audience is obliged to be truthful. Now, consider this excerpt from CNN today…noting the “angle” (and that’s being nice) that CNN reporter Ali Velshi takes:
KEITH MCCULLOUGH (GUEST ON CNN): I think what’s happening in Europe is just a preview as to what’s going to happen in the U.S. It all basically starts with debt. So if you believe as a government official that you can solve the problems that are anchored in debt with more debt you are going to end up with the same problems that the Europeans are facing. And I think that we are three to six months away from that coming home to roost here in the U.S.
VELSHI (CNN ANCHOR): Why is it that lots of people go out of their way, Keith, to tell us how the U.S. is not the same as Europe? Our debt issues are certainly are not the same as Greece’s, as Italy’s, as Portugal’s, why are you suggesting that we will get into the same pickle?
MCCULLOUGH: At the end of the day from a deficit perspective, the U.S. — the deficit as a percentage of your GDP is exactly like Greece. It’s going to be pushing close to 12 percent. And anytime we have an issue, like today, for example, with the jobs report what is the answer? The answer is more government, more government spending which is going to simply keep pushing that deficit?
VELSHI: Hold on. What are you talking about? When you have a jobs report like this week, the answer is more government, more government spending? Where did you hear that from? We’ve been discussing that endlessly. That has not been anyone’s suggestion.
MCCULLOUGH: Well I think that that is definitely going to be the suggestion. If you look at this mornings …
VELSHI: Keith, this isn’t an opportunity to just come up on TV and bash government. What are you talking about?
MCCULLOUGH: This morning’s number, if you look at the job ads, 400,000 of them were government-hired workers.
VELSHI: So no one has come out and said, oh my god, let’s have 800,000 government jobs next month. Everybody has said, this is not the way we actually want things to go. We want more private sector hiring. Christine, have you heard one person telling you that this is fantastic; we should have more government hiring? I don’t know what Keith is talking about.
VELSHI: I don’t understand what your premise is, Keith, because that’s not the answer. What should we be doing differently?
MCCULLOUGH: Well the answer will be, from a political perspective, that is a forecast, Ali. That is a forecast. That is what government’s do that have problems, they spend more and more money, taxpayer money to hire.
More from the transcript:
MCCULLOUGH: I think that, look, the market’s ganging up on the three of you because at the end of the day the market doesn’t lie, politicians and people do. And the American government said they were going to solve this than you can go do that. But risk management Ali, starts with watching what the market is telling you.
VELSHI: I hope the market is as cruel to me next year as it was last year. I hope I suffer through another 70 percent gain in the broader markets, Keith. If that’s your biggest plague that you wish on me, I’ll take it.
Consider those last few sentences of arrogance from Velshi as you read the stats that he forgot to mention:
The S&P 500 (SPX) closed on 5/22/2000 at 1400.72 and closed on Friday 5/28/2010 at 1089.41. That is a 22.2% loss in value in ten years of buy and hold investing not allowing for inflation. That means a buy and hold investor lost 22.2% of their money plus another 20% for inflation — a 42% haircut. The period of history the buy and hold advocates really don’t want you to know about is 1929 to 1954. The highest close for the Dow was 381.17 on 9/3/1929 before the beginning of the great bear market, and it took 25 years to get back to ‘even’ on a nominal basis (not counting inflation). The Dow closed above 381 for the first time on 11/23/1954 after the 9/3/1929 high.”
Does Velshi seem like an honest guy as he yucks it up about “suffering through a 70% gain” while failing to mention the real stats [the real stats of buying and holding being underwater for over 10 years]? No, he doesn’t. Is he the type of guy who should be educating anyone about money and markets? Clearly not. As a teacher, I resent Velshi’s reckless use of a CNN megaphone to preach to many who surely don’t know that he is full of it.
***
One reader responded to my comments above by saying:
Isn’t what you’ve written below libelous (not to mention an unnecessary personal attack)? ‘Does Velshi seem like an honest guy as he yucks it up about “suffering through a 70% gain” while failing to mention the real stats? No, he doesn’t.’
The libel is? The personal attack is? The unnecessary part is?
Since you have thrown out a very specific and unfounded attack against me (libel), and since you have failed to back your view in any way, it is assumed that you agree with Velshi (that is unless you correct my assumption).
With Velshi tossing out that 70% line he is saying clearly:
1. That he made that 70%.
2. That he is a buy and holder.
So if he is a buy and holder, and he says he made 70% while ignoring the prior 10 years where all buy and holders are still underwater — he is manipulative at best. Or, and I guess this is possible, perhaps Velshi perfectly timed the bottom from March 09 to May 10 and that’s how he made his 70%? And if he is this wonderful market timer, capable of nailing bottoms and tops perfectly, where is this all disclosed?
When someone appears on TV regularly to large audiences, when they preach money and markets, and when they make the statements Velshi does, I stand by my view. The fact that you are remotely sympathetic with Velshi, and since you seemingly see nothing wrong with what he is doing, you make my point better than I ever could.
