Monday, May 19, 2008

Quotable quotes: the Market direction edition

Which way do you feel like lurching, Mr. Market?

I guess this week can be wrapped up as the 200 day MA week! Everyone was talking about the significance of a breakout above that level on the S&P500 and the Dow.

-We are at a point where the YTD losses are being erased. That could feed in some “extra cash” and keep us going sideways/up for the next few weeks.
-All that emerging markets money which went into commodities could very well rotate into stocks.
-We've had some solid action, with the S&P closing at or near it's intra-day high.
-Can we have a rally if the energy prices go down, dragging the energy and materials sector with them? Can we sustain this rally if the commodity prices/sector continue going up?
-I’m looking out for a Yen breakout and a ten year yield breakout. I think we could be seeing 4% yields on the ten year and a 107 on the Yen before we are through with this rally. (I’ve talked about a reversion to the 200 day MA in my posts earlier). (You can also check out an earlier market direction post)
-I feel the risk-reward situation is for a 5% upside, and a 15% downside.

Well, why listen to me? Let’s catch up on what the strategists are saying on the market direction in this marathon edition:

  • Teun Draaisma : We think the bear market rally is at or near its end. We do not recommend investors to be short yet, and our index target implies 0% downside on a 12-month view. If we were to go 5% higher from here, the risk-reward to short equities would be good.

  • Rick Santelli: It’s a question of realistic expectations. Realistic is that the darkest impact of the credit crisis and the industries in the construction and the housing sector may be behind us. But it's the rate of change.. it’s kind of how much of the path we have going forward. The truth is somewhere in between. Having a bottom is one thing. Having a parade that we are going to the moon is the other end. :)

  • Michael Kahn: The good news is that last week's stock market slide was halted right at the rising March trend line. The better news is that the Russell 2000 has finally broken free from its 2008 trading range. The rally is still on the ugly side with market breadth lagging behind price action and volume still fading.

    Another bit of ugly comes from the NYSE advance-decline line, which has not yet moved above its 2008 range. Market breadth has not confirmed the rally, at least not with any degree of confidence.

    Based on the evidence, we do have a rising trend but one that does not have solid technical underpinnings to sustain it. That means short-term investors can follow along as long as they never take an eye off the long-term chart. It is still a bear market rally.

  • Mark Hulbert : The average equity exposure of the market-beating newsletters over the past 20 years is only seven percentage points greater than for the market-lagging newsletters. In March, the comparable difference was 21 percentage points. This lessening of the bullish plurality is not an outright bearish omen, in my opinion. But it does point to the bullish case not being as strong as it was two months ago.

    To be bearish right now, you have to bet that the market timers who have lagged the market over many years are now, uncharacteristically, going to be more on target with their forecasts than the timers whose market timing calls over the years have added value.

  • Jim Rogers :US stock market is still too high as far as I'm concerned! Some stocks went down a lot, but the overall average is down, what, 6%? I'm surprised the market is not down more! The recession is going to be a lot worse than what we've had in a long time. I may be wrong, won't be the first time I am wrong. But it won't be the first time the stock market is wrong either! Zinc and nickel are down 50%. I've started looking at metals again. India and China are still there! Dollar might rally for the rest of the year!

  • Jeffrey Saut: Isn’t it amazing how fear has morphed into greed in a mere seven weeks, for now the cry on the “Street of Dreams” is about the new bull market that has emerged! We, on the other hand, have turned cautious. Our caution centers on the belief that our economic problems are NOT all behind us, the Dow Theory “sell signal” of November 21, 2007, the double-top chart configuration of the SPX at 1560-1570, and the 20-month moving average (MMA) (aka “The Snake”) that has often represented the demarcation line of bull and bear markets.

  • Bill King: For obvious reasons, permabulls, street paper pimps and their stooges in the financial media mitigate the fact that financial firms are raising and must continue to raise enormous amounts of capital and overemphasize purported good news.
    The big sucker rally that we warned almost always follows March (1907, 1929, 1980), and sometimes April (1987) crises as well as soft Q1s in recession years (1990, 1991, 2000, 2001, 2002) is now occurring. And after such sucker rallies, an autumn debacle is a very high probability.

  • David Kotak, Cumberland: We are fully invested worldwide in equities using exchange-traded funds. We will hold these strategies as long as we see the expansion of the Fed’s tools applied for the purpose of restoring the financial system to more normal functionality. When and if we see the Fed reaching a level of cessation of expansion of the tools, we will be proactive in reallocating assets.

    For now this activity is very bullish for equities, and it supports our notion that the US slowdown will be shallower and shorter than it would otherwise have been, had the Fed not become aggressively proactive last December and continued that pro-activity to present.

  • Wilbur Ross : At best we are in a period of stagflation. In the worst case a combination of inflation and a poor economy, largely due to the consumer. Consumer is tapped out and sort of fatigued. I don’t see multiples expanding.

  • George Soros : I think this is a fairly difficult bear market really. I could be wrong, but this is it. I think this is a bear market.

  • Lawrence McMillan: This has been a very strong week, and -- for now -- the danger to the bullish case has passed. $SPX twice tested the trend line, bottoming at 1384 and 1386 last Friday and Monday, respectively. That held, tentatively at first, and more strongly now that $SPX has risen above the 1420 level -- an area that had inhibited advances five separate times this month. Clearly, our observation last week that the trend line was the most important thing about the $SPX charge, was true. In summary, all systems are bullish, and that is evident by the trends in these indicators: the rising bullish trend on the $SPX chart, and the (declining) bullish trends on $VIX and the equity-only put-call ratios.

    Moreover, breadth is overbought, and thus conducive to the bullish case as well. We see no danger to the uptrend until at least two of these reverse direction -- something that doesn't seem too likely at the moment. Equity-only put-call ratios have remained on buy signals since shortly after the March bottom.

  • Anthony Bolton (Fidelity Special Situations) : The recent snap-back in share prices could be short-lived as stock markets face renewed weakness. Equity markets might not hit lows until early next year. The equity market’s slide that began last August might mark the beginning of a prolonged bear market and that the recent rise in equity prices is a “bear market rally”.

  • John Catsimatdis: The dollar is being devalued 30-40% The Dow is still at 12000 something. Yes, it has a lot to rise.

  • Ron Baron: Dow Jones was 11700 on 2000. It’s now 12500. So market has gone up about 1-2% for the past 8-9 years, so yes there is a lot of opportunity in our opinion.

  • John Hussman : With the U.S. stock market still relatively overbought in an unfavorable Market Climate, there is continued risk of substantial and possibly abrupt stock price weakness. As I've noted frequently, I rarely have much of an opinion on near-term direction except when conditions are either overbought in an unfavorable Climate or oversold in a favorable one. We observed some initial weakness late last week, but we remain braced for more significant trouble.
    At the same time, we have to recognize that the rebound through early last week brought market internals not far from the point that would begin to feed purely speculative “trend chasing.”

  • Clark Yingst, chief market strategist at Joseph Gunnar & Co: A lot of the lack of volume is accounted for by the deleveraging of the hedge funds. Requirement of more collateral is a reason for this. Near term Dow resistance level is at 13200. The market is anticipating a better US economy 6-9 months further out. We don’t necessarily agree with that. But we are taking the market action at face value, trying to capitalize on that. We are more inclined to view individual stocks as short term trading vehicles rather than investment vehicles, thinking that if that scenario does not unfold later this year, the market could have a serious retracement.

  • Jeremy Grantham : Sit on the sidelines, unless you're one of those nimble, quick-on-the-button traders who can move money around really fast and leap in and out at the right times. That's a good way to make money if it's your skill set. But for ordinary dudes with a seven-year [time] horizon like us, you've got to pick the long-term fundamental events and stick to them. The toughest thing to do is to stay out of the market, load up on cash and fret about all the money you're not making. But that's probably the best advice. Let the other suckers take all the risk.

  • Alec Young(Standard & Poor's): We are bullish but a little more cautious. We think the market continues to move up through the year. We priced in a weak economy and high oil. We still have enough macroeconomic headwinds eg. analyst revising earnings estimates downwards, that we believe the direction is going to be more two steps up, one step back.

  • Robert Pavlik, of Oaktree Asset Mgmt: I’m very positive on the stock market. I think the market has all the ingredients right now for it to move higher as the year goes on. We are faced right now with a lack of confidence. As we approach the 200 day MA we have an interesting chart pattern developing. It’s an ascending triangle, which is a very positive pattern for going forward. We just need one catalyst to get us over the flat line going up and the market goes up from there.

  • Barton Biggs: Sophisticates are bearish and pessimistic. I am bullish and I believe we have seen the worst. Tech is a major place to be. A great trade would be long financials and IBanks, and short Materials and energy sector.

  • Bill Strazzullo, Bell Curve Trading: The response to the sell-off has been extraordinary. Traders are buying because they have a backstop in the Fed. & Govt. The price for this liquidity is a weak dollar. Does the risk-reward make sense, with all the major issues and challenges? We had looked towards the move towards 1450 on April 10th, and this is where we get off the train.

  • Jordan Kotick (Barclays Capital): Markets around the world are breaking to new all-time highs, led by Brazil. Brazil still has a lot of upside.

  • Stephen Pope(Cantor Fitzgerald Europe): I don't think people can actually afford to sell in May and disappear because there's too much money sitting in the wings that needs to find a home

  • (From Quantifiableedge): Dr. Brett Steenbarger tracks the 10-day moving average over the 200-day moving average of the CBOE total put/call ratio. That reading dropped below 0.85 for the first time since October – also not a good time to be long.

  • Liz Ann Sonders: The current bear market for the dollar is the longest since at least 1967.The current period ranks second in terms of declines, down 41% (July 2001 peak to April 2008 trough), behind the 48% decline seen from February 1985 to December 1987. Entering a new bull market for the dollar would bode well for equities, as the average performance of the S&P 500 during dollar bull markets (averaging 1,708 calendar days) is 86% versus only 16% for dollar bear markets.

    I've often noted the perfect inverse correlation historically between core inflation (excluding food and energy) and market valuation. However, historically, sustainably high food and energy prices have eventually filtered into core inflation. If we get a commodity price reprieve, it should lower core inflation expectations—which could lead to equity valuation expansion.

  • VixandMore: Strong bear signal from VIX:VXV ratio lowest level to date on Thursday, previous low was 12/21/07. At the very least, the bulls should consider some downside protection in the current market environment. I suspect the bears are preparing to pounce very soon…

  • Check out that short interest!

  • Michael McCarty(Meridian Equity Partners) (on the low VIX): This measure broke through a trend established in early 2007 and now appears to be headed lower. The move down is real, and that for investors represents a sea shift, much like in sailing from a headwind to a tailwind. The movement in pricing of risk is now beneficial to stock prices.

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Full Disclosure : No positions