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Ryan Detrick on Bloomberg Radio: Year-End Rally, Anecdotal Sentiment, and Consumer Stocks

A year-end upswing could be in the works for the stock market

by 10/8/2012 2:07:05 PM
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Bloomberg Radio had me on last week to discuss my views on the market. I've been doing these interviews for years with Pimm Fox and Courtney Donohoe, and always enjoy discussing what we at Schaeffer's are seeing out there. The three of us touched on a variety of subjects in the five-minute interview. Click here to listen to the entire interview.

Here's a quick summary of what we discussed:

  • Talk about why you can't get enough of this rally. While near-term concerns are popping up, looking out further, the odds of a nice year-end rally is very real. At Schaeffer's, we like to look at the world based on expectations and sentiment. Back in my May Bloomberg Radio appearance, I said that we were expecting a surprise summer rally, because no one else was expecting it. Not much has changed. One of the best ways to view expectations is through anecdotal sentiment, in other words, what's heard from the average investor or the talking heads on TV. One very powerful example of just how low expectations are can be seen in a recent survey by Franklin Templeton. They interviewed 1,000 investors and incredibly, the majority thought the market was lower the past few years. Of course this isn't the case, but it hammers home just how most people have missed this bull market. And from a contrarian point of view, this is very bullish longer-term.

  • What are some of your own indicators telling you? One of our favorite indicators at this juncture is short interest. Incredibly, short interest on all optionable stocks in our database is near its highest point this calendar year, and near the levels it was back during the March 2009 generational lows. So, what does that mean to someone listening? It suggests there is huge potential for a massive short-covering rally -- as those bearish bets are unwound -- as well as some explosive fireworks into the end of the year. Read more on Schaeffer's view of short interest here.

  • How long can the short sellers stick with their bearish bets? It's starting to happen already. In fact, 92% of hedge funds have underperformed this year, on top of underperforming the previous three years. But it doesn't stop here. Think about this, the Dow Jones Industrial Average (DJI) has gained in 11 out of the past 12 months. At the same time, there was a record 17 straight months of domestic mutual fund outflows. Yet, people continue to bet against this rally. When considering how wrong hedge funds have been, it's repetitious to say, but there really is a lot of money on the sidelines, which could push the market much higher. Now, it will take confidence to improve and get money into stocks, and some of the things we look at suggest the economy might, in fact, grow. Credit markets, merger and acquisitions, dividends, and share buybacks: all of these things suggest that in three to six months from now, the economy will be on much better footing and bring about some improving confidence.

  • What do you see ahead for consumer stocks? We still really like the consumer area. Coming into 2012, housing was our favorite sector, and most of the names within the sector are up huge so far this year. Although we still like this area, we might buy on a pullback at this point. We continue to hear all of the worries and negativity out there on the consumer, but we believe it is already baked in. Should any good news occur, consumer names will continue to lead the market higher. At Schaeffer's, we like to buy expectations, and expectations on consumer stocks remain very, very low.

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