Suspension of Disbelief: Rally Has Further to Go, Bernie Schaeffer Says
Posted Dec 07, 2009 09:46am EST by Aaron Task in Investing, Recession
Friday's disappointing response to the strong jobs report, and weakness early
Monday, has some observers once again calling for the end of the bull market.
It is precisely this kind of skepticism that makes Bernie Schaeffer, chairman
of Schaeffer's Investment Research, believe the rally still has further to go.
"The juxtaposition of strong upside price action and continued skepticism and
outright bearishness -- that is a very bullish sign," Schaeffer says. "There's
a lot of money on the sidelines that has not been committed to the market.
People talk their positions. Until they start accepting and getting
enthusiastic [about stocks] it's an indication there's more money to power the
market higher."
The veteran market watcher says there are four major stages of investor
sentiment: despair, disbelief, acceptance and euphoria.
If March was the moment of despair - when bearishness reaches its apex -
sentiment is currently in the disbelief stage, Schaeffer says, citing the
following:
* The Dumb Money: Through October, equity mutual funds had net outflows of
$1.9 billion year to date while bond funds had inflows of about $312 billion,
according to the ICI. Furthermore, there's been about $10 billion of inflows
into inverse funds that short the market, Schaeffer notes. "It not even that
money is not coming off the sidelines - [investors are] betting against the
market."
* Magazine Indicators: In 1982, a Business Week cover declared "The Death
of Equities", perhaps the most famous contrarian indicator in history. More
recently, Time proclaimed "Why it's time to retire the 401(k)" in October,
while Newsweek weighed with a "Boom and Gloom" cover story, which basically
dismissed the validity of the market's recovery. Such covers in general
interest magazines suggests how negativity about the markets permeates popular
culture, Schaeffer says.
* Guru Chatter: There's a lot of talk these days about the "New Normal,"
characterized by high unemployment and sluggish economic growth. That may well
prove true but to Schaeffer, it's a mirror image of the "New Economy" chatter
circa 2000. Similarly, there's a lot of talk now about the "death of buy and
hold." Schaeffer is a market timer but says now probably is a better time for
buy and hold-type investing vs. 10 years ago.
Add it all up and sentiment suggests the rally has further to go, Schaeffer
says, suggesting the S&P could ultimately double from its March low of 666,
giving a target of 1332 or 20% higher than current levels.
One more (meta) thought: part of Schaeffer's bullish thesis is that it's easier
to invest when the market is transitioning from despair to euphoria, as he
believes is currently the case. In other words, that sentiment works best when
it's not at an extreme, which itself runs contrary to the popular consensus
about sentiment.
