Category: Jim Paulsen

Where are the ominous headlines?

Biotech Index - 140413


The momentum stock bubble burst last week, with highflying stocks showing significant declines from their February/March highs:

  • brokerage stocks: -10.8% (high set on March 20)
  • housing stocks: -9.4% (February 27)
  • Internet stocks: -17.1% (March 4)
  • biotechnology stocks: -21.1% (February 25)
  • Tesla Motors: -20.0% (March 4)
  • Netflix: -28.2% (March 4)
  • Twitter: -45.4% (December 26)
  • 3D Systems: -50.1% (January 3)

Yet a brief scanning of the financial headlines shows little concern:

  • – “Stocks fall as volume rises, but here’s why not to worry”
  • The Wall Street Journal – “Stock-Market Jitters Put Investors at Ease; Recent Turbulence Is Seen as a Healthy Sign”
  • CNBC – “Last week’s big selloff ‘probably over': Pro”
  • – “Don’t let these stock market gyrations scare you; It’s likely that we’ve seen the end of recent declines”

The common theme among pundits is that the momentum bust is isolated, contained, healthy, and even predictable.  CNBC quoted Jonathan Golub, chief U.S. market strategist at RBC Capital:

“I think the selloff is probably over.  If you look at the economically sensitive stuff in the market, it’s not really selling off. It’s tech. It’s bio-tech [which makes up about 10 percent of the market.]  The other 85 to 90 percent is in perfectly fine shape.

This weekend Barron’s patted itself on the back for predicting the tech bust several months ago:

In November, when pundits began to natter about a stock market bubble, we pointed out in a prescient cover story that it was a tech bubble, not a market bubble.  Our advice has paid off handsomely.

Barron’s quoted perma-bull Jim Paulsen, chief investment strategist at Wells Capital Management:

My guess here is that we’re having a valuation adjustment in one small part of the market, in the highflying momentum stocks that got ahead of themselves and are now correcting.  I think this is more of a buying opportunity.

The article concluded:

All this suggests that despite some ominous headlines, the stock market’s health is still good. [emphasis added]

Where are the ominous headlines?  We don’t see any.  We see complacency as far as the eye can see with the assuredness that the momentum stock bust is “contained.”  We heard these same words in April, 2000 after the dot-com bust and March, 2007 after the subprime bust… early warning signs that were overwhelmingly ignored.



USA Today: Bull market on solid footing

“The dizzying 2013 stock market rally was reignited Tuesday by multiyear highs in home prices and consumer confidence, a sign the bull run reflects a healing economy and not just the Federal Reserve’s easy-money policies.”  The front page USA Today article quotes two popular permabulls: Brian Belski…

“The economic numbers we’re seeing are confirming what the U.S. stock market has been telling us all year: The economy is on a stronger footing and improving longer-term.”

… and Jim Paulsen:

People are having trouble understanding why the market is going up when the economy is growing slowly, jobs are hard to find, and corporate profit growth is slowing, and they are left with the idea that the rally is just a sugar high from the Fed.  My take is that rising confidence is driving the stock market higher, [adding that investors now believe the worst-case fears they’ve harbored since the 2008 financial crisis won’t be realized].

So there you have it: the 2008 meltdown in the stock market and economy was simply a technical malfunction caused by credit locking up.  The Fed diagnosed the problem correctly, applied some anti-freeze to the credit radiator, and got the economic engine back up and running.  Mission accomplished.  The Fed’s mechanics can now do a victory lap and go back to their auto repair shop and watch paint dry. But what if the sugar high metaphor is more appropriate?  Could the recovery in housing be artificial?  Consumer confidence baseless?  The economy on quicksand?

Does a bull on the cover of a popular mainstream newspaper signal misplaced optimism and impending doom?

Delusions of optimism

The cover of this week’s Barron’s refers to an article on page 7 with the tease, “Bullish news: Fear is rampant.” The author, Jonathan Laing, cites a report put out by James Paulsen, Wells Capital Management’s strategist and long-time talking head on CNBC:

Also bullish is the fact that investor sentiment is in the dumpster. [Paulsen] calls it “dominance of doubt.” Investors put little trust in bullish developments such as the much-maligned economic green shoots, the sharp narrowing in the yields of all manner of fixed-income instruments over Treasuries, or even corporations reporting better-than-anticipated earnings. This psychology could lead to huge upside price potential in stocks once the bears become converted, he argues.

Leaving aside Paulsen’s credentials as a perma-bull who failed to see the greatest economic crisis since the Great Depression coming, the evidence of bearishness appears thin. For starters, Newsweek declared on the cover of a recent issue, “The Recession is Over!” The “VIX,” a measure of expected volatility (referred to as the “fear gauge”) hit a low of 23.09 on July 24. This was the lowest reading since September 8, 2008 when the S&P 500 stood at 1268, right before plunging 37% in 2 1/2 months. The Investors Intelligence poll, which showed 47.2% of newsletter advisers bearish in early March, is now down to just 26.4% bears. Similarly, the Consensus Inc. survey showed just 18% bulls at the March low vs. 51% today.

Our favorite sentiment indicator is still the asset mix of Rydex bull and bear funds. Currently just 26.4% of the assets in these “directional” funds are betting on the downside. At the height of the credit bubble the lowest bearishness reading was 30.8% on October 31, 2007. At the time the S&P 500 stood at 1549; yesterday’s close was 1006. For perspective, at the March 9, 2009 bottom (S&P 500 at 677), 52.0% of the assets in Rydex’s timing funds were positioned for a further decline.

Contrary to the claims of the bulls, there is no “dominance of doubt,” just a preponderance of delusion.

Note: The Fund’s equity short position was 136% on September 8, 2008, 21% at the beginning of this year, 2% at the March 9 low, and 67% as of yesterday’s close.

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