What’s an investor to think?
Investors may look at a mass of conflicting figures and wonder which way things are going, says this U.S. advisory. The answer is up.
There’s a long lineup in at an unemployment office somewhere in America.
Well back in the line, one person whispers to another: “Recession’s over ... pass it along.”
This cartoon sums up the gap that often exists between the economic news in the headlines and the day-to-day perception many have of this ongoing crisis.
It appears on the front page of The Primary Trend, published in what is generally held to be the heart of the unflappable American spirit, the Midwest. Milwaukee, Wisconsin, to be exact.
The editor, Mr. Barry Arnold, is an investment counsellor. And he places “a great emphasis on investor psychology.”
Right now, he sees reasons for optimism despite the mass of mixed signals that emanate from the stock market and the economy.
Before we plunge into his analysis of the changeable sentiment of investors, we should mention that there is one Canadian stock he continues to recommend as a bridge over troubled waters.
Barrick Gold (TSX/NYSE-ABX), the world’s largest gold miner, represents a good buy in a schizophrenic market, in Mr. Arnold’s opinion. And in fact, Barrick has been charging up the charts this morning.
What should investors think of all this frenetic market activity?
The climate grows brighter
America’s Gross Domestic Product (GDP) was pretty darn good in the third quarter, the first positive number after a string of dreary results.
But the unemployment rate is still pretty darn bad. Over 2.7 million people have lost their jobs since the Obama stimulus package was passed in February.
Unemployment hovers around 10 per cent and it’s not likely to improve dramatically in the short run. But remember, says Mr. Arnold, “that these stats are lagging indicators — they will continue to get worse while the economic climate grows brighter.”
The stock market, on the other hand, is a leading indicator, one that “peaks and bottoms well before we, as investors, sometimes know why or have economic proof to support it.”
In this sense, the state of equities today is no different from any similar period in the past. It is sniffing out a recovery. “But the economic numbers to support this bullish move are only surfacing today, seven to eight months after the market bottom.”
Those who have been waiting for economic confirmation are now being compelled to jump on board the train, the editor says. “At least that’s what we feel will propel this stock market higher in its next leg up.”
The sheep pile in
Here’s the secret to reading the market. Measurements of bullish or bearish sentiment don’t really count for that much when the consensus is all in one direction, says Mr. Arnold, but “they are extremely telling at turning points when contrary opinion is most valuable.”
This editor refers to the measurements of investor sentiment in Investors Intelligence. And they’ve flip-flopped. In March, bears outnumbered bulls by two to one. Now it’s the opposite.
“This switch to the bullish camp does give us pause and reason for concern,” he remarks. “However, this is but one measure ... and sometimes the crowd is right.”
A better measure might be taken from a benchmark called “Net Attitudinal Reading,” which is drawn up by Leuthold Research in Minneapolis. Taking many more variables into account, this reading shows that more investors are bullish now than a year or six months ago — but that the level of bullishness is still far from the extreme levels that would be expected at a market top.
This is born out to some degree in the behaviour of investors, adds the editor. “Actions speak louder than words (or opinions, in this case) and it looks as if the sheep keep piling into bond funds even in the face of high-octane returns in stocks.”
Jumping into bond funds with interest rates so low even after a huge run-up in stocks seems proof positive that the market can climb a “wall of worry,” Mr. Arnold decides.
And there’s one more worry. The U.S. dollar.
The buck burns
The dollar goes down, the stock market goes up, and vice versa. That’s been the theme throughout 2009, the editor points out.
But this has not always been the case historically. From 1995 to 2000 a strong dollar and a booming market went hand in hand. In 2001 and 2002, they both sank together.
“Today’s strategists and commentators wouldn’t know what to do with themselves if both moved in tandem today as they did back then,” he remarks tartly.
The overwhelming consensus opinion, Mr. Arnold adds, is that “the buck will continue to burn.” In this case, he’s not comfortable with consensus opinion. In fact, it suggests to him that the opposite may happen and the greenback may rally.
But any such rally need not sink the stock market, he insists. “It may prove a hindrance in the short run only because Wall Street has talked itself into believing that to be the case. But again, rekindled confidence in our currency could actually aid and abet this cyclical bull market ... not snuff it out.”
So speaks a commentator from the heart of America. In the midst of many mixed signals, he sees the sun behind the clouds, and possibly “the beginning of a spirited year-end rally.”
Happy Thanksgiving, he tells his readers. And he means it.
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