Monday Morning Outlook

11 Signs This Rally Isn't Over

Lingering skepticism could have bullish implications this earnings season

by 10/13/2012 9:15:18 AM
Stocks quoted in this article:

Stocks took a breather last week, with the Dow Jones Industrial Average (DJI - 13,328.85) ending four of five sessions in the red. Nevertheless, the blue-chip barometer and S&P 500 Index (SPX - 1,428.59) found support atop their 50-day moving averages, while the tech-rich Nasdaq Composite (COMP - 3,044.11) found a familiar foothold in the 3,040 neighborhood.

However, as Ryan Detrick points out, there's mounting evidence to suggest this pullback is just a blip amid the longer-term uptrend. In fact, we haven't yet reached the sentiment stage that marks market tops, meaning there's still plenty of sideline cash to fuel further upside. In the same vein, Rocky White examines how the SPX tends to fare amid earnings-season skepticism, and what that could mean in the wake of Alcoa's (AA) latest report. Also featured in this week's analysis:

And finally, we'll end with a review of next week's calendar and a look at two of our favorite sectors.

Notes from the Trading Desk: We Aren't Even Close to Euphoria
By Ryan Detrick, Senior Technical Strategist

Last week, Schaeffer's Senior VP of Trading Todd Salamone warned of some short-term issues, and said to be on the lookout for some weakness -- and that was exactly the case, as the Dow Jones Industrial Average (DJI) dropped the first four days of the week before edging higher on Friday. Overall, Todd has done a great job of navigating you through the market this year. He's been bullish throughout, but noted and nailed some times of potential weakness. This week, I'll take a much bigger-picture look at things, and reveal why this market still could go much, much higher.

Our methodology here at Schaeffer's says markets bottom at despair (think March 2009), and begin to rise on disbelief. Eventually, the bull market finds acceptance (this can be the longest stage), and then the blow-off top ends things with euphoria (think tech in 1999 or housing in 2007). In fact, one of the easiest ways to sum up why we've been so bullish for more than three years is very few investors believe this rally. The old saying "The market climbs a wall of worry" is alive and well.

Four Stages of Sentiment

What is fascinating with the current bull market is there are still signs of disbelief! Sure, there are signs of acceptance, but one thing's for sure: we aren't anywhere close to euphoria. There are many ways to measure market expectations, and one of my favorite is what we call anecdotal sentiment. This one is very tough to quantify, as it can best be summed up as what you might hear at a cocktail party or what the talking heads are saying on TV. If everyone around the Thanksgiving table is talking about buying gold, you know gold is about to peak. That's how best to summarize anecdotal sentiment.

Anecdotal evidence usually has a much smaller sample size, and the chances it could be cherry-picked are greatly increased. Nonetheless, finding solid examples of negative anecdotal sentiment could very well be some of the most powerful reasons to stay bullish, even after all of the massive gains we've seen the past three years.

Below is a list of the top 10 negative anecdotal sentiment indicators. Remember, one or two by themselves could be arguably "random" and not viable as reasons to stay bullish. But when all are taken together in context, the odds that this bull market has a long way to go in terms of both price and time till we reach euphoria are very real.

1. Even in the face of a higher market, analysts are becoming more bearish. Turning to the S&P 500 Index (SPX), the percentage of "buys" among its components has steadily dropped since the lows late last year. In fact, the last time the "buys" were this low was April 9, 2010, when the SPX was beneath 1,200! This skepticism in the face of increasing prices bodes well for a continuation of the rally.

SPX Stocks and Percent Buy Ratings

2. The Yale School of Management Crash Confidence Index is near 30%, about half of where it was near the market peak in 2007. This survey shows the collective confidence that there will not be a crash over the next six months. In other words, with similar prices now, the perception there will be a crash over the next six months is much higher.

3. A recent Franklin Templeton survey of 1,000 investors showed a massive disconnect from reality and perception of market performance. This hammers home just how many people have totally missed this rally.

  • 66% thought SPX was down in 2009

  • 48% thought SPX was down in 2010

  • 53% thought SPX was down last year

4. CNBC and other market-related channels have had very poor ratings -- yet another sign of how this bull market isn't getting as much attention as you'd expect. Below is the latest data I could find, from last quarter.

  • Squawk Box (6 - 9 a.m. ET) is supposed to prime traders before the bell. The show posted its lowest-rated time block since the fourth quarter of 2006.

  • The Closing Bell (3 - 5 p.m. ET) is supposed to wrap up the day's action. The slot posted its fifth-lowest ratings in total viewers and second-lowest ratings in the key 25-54 demographic since 1997.

  • Fast Money (5 - 6 p.m. ET) is focused almost specifically on swing-trading stocks. That time slot showed the lowest rating for the 25-54 demo since 1997 -- and lowest in total viewers since Fast Money launched in 2006.

5. SmartMoney magazine last month terminated its print edition and moved totally to an online service. Could be a sign of the times, or yet another sign investors aren't interested in this bull market.

6. For the first time in its history, mutual fund giant Fidelity reported that it now has more assets in bonds and money markets than stock funds.

7. A Financial Literacy Group survey found that 75% of high school students think the stock market is rigged.

8. Bond king Bill Gross declared "The cult of equity is dying."

9. There's been a record 17 straight months of domestic equity mutual fund outflows, according to the Investment Company Institute (ICI). Now, a good majority of this money has moved into equity exchange-traded funds (ETFs), but it still shows a huge distrust with mutual funds and Wall Street, as investors would rather do it themselves.

SPX vs Domestic Equity Flows Since January 2008

10. If you are a bull, odds are you've been crushed for a variety of reasons. From "this rally is simply Fed-manipulated," to "its overvalued," to "QE is the only reason prices are higher," there are numerous reasons the crowd thinks things will come crashing down. I've been absolutely hammered on Twitter for being a bull. My take is: To be hated for being bullish in a huge bull market is very powerful.

For good measure, here's a Bonus No. 11: A Bloomberg survey that looks at the average recommendation for stocks from U.S. chief strategists on Wall Street is near a 15-year low. A good deal of investors have missed this rally, and this survey suggests some of the "smart money" on Wall Street might have missed it as well.

Finally, Schaeffer's will be at the New Orleans Investment Conference later this month. We'll have a booth and I'll be giving a presentation, as well. If you are in the area, please come on over and check it out -- the lineup is (obviously) awesome.

Thanks for reading and good luck in your trading.

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