Whether you are looking at the action over the last two months or since the market low on March 9, 2009, there is little doubt that the current joyride to the upside has been one for record books. In a little over a year, the S&P 500 has rumbled higher to the tune of +79% while the NASDAQ has soared +98.3% and Russell 2000 small caps are up an impressive +110.45%, all as of April 15th.
Yet up until just recently, this has been a bull market that the media has loved to hate. There has been oodles of ink committed to the death of the consumer, the next great bubble we need to worry about, the risk of sovereign debt defaults, the dour outlook for housing and commercial real estate, and the idea that the job market is not going to recover this time around.
However, with the economic data now starting to show consistent improvement, the job market now creating a few jobs, and the market now running higher almost on a daily basis, the media seems to have changed their tune. For example, running through the headlines below seems to indicate that it is party time…
-
America is BACK!
The Remarkable Tale of Our Economic Turnaround (Newsweek, April 19, 2010)
-
Dow 11,000 Is Only the Beginning
(The Wall Street Journal, April 7, 2010) -
Double Dip? Hell No!
Here’s why you can be sure the economy will grow 3% or more this year and next, boosting jobs and stocks. (Barron’s, March 22, 2010) -
Relax, We’ll Be Fine
(The New York Times, April 5, 2010)
So, with the media now onboard the recovery train, should investors embrace the new feel-good environment or is it time to worry?
According to analyst Paul Montgomery, who has done a great deal of study on the topics of investor sentiment in general and magazine cover stories in particular, all this good news in the press is indeed a good thing – for a while.
Montgomery’s work shows that when we see cover stories become one sided, there may be trouble ahead.
“The market tends to go in the direction of the cover story for about a month, but then 80% of the time the market goes contrary to the ‘cover story’ over the next year,” Montgomery says.
The thinking here is pretty simple. Magazine and newspaper (as well as the online versions of both) cover stories are designed to do one thing - sell magazines and newspapers. Thus, the argument can be made that the cover story targets what people are thinking about. Something that is hot, current, and ideally, controversial, tends to get people’s attention.
The problem is that by the time the media gets around to noticing what is happening in either the market or the economy, much of the move in the market has usually already occurred. Remember, the stock market is a discounting mechanism of what is expected to happen in the future. The time to buy stocks en masse and aggressively is when a turn is about to happen or is in the early stages – not after we get confirmation in the media that the event in question (in this case, the turn in the economy) has occurred.
It is for this reason that we employ sentiment indicators in our market models. In short, when the crowd all starts singing the same tune, it can pay to start thinking about going the other way.
At the present time, our sentiment models are waving a warning flag. However, it is important to understand that, like the boy who cried wolf; a warning flag can stay in place for quite some time. For as John Maynard Keynes said, “Markets can remain irrational a lot longer than I can remain solvent.”
In sum, it is important to recognize that while the bulls are indeed on a roll and there may be more upside ahead, this move is getting long in the tooth and is vulnerable to disappointment.
Remember, you are in control your email alerts! You can receive alerts for up to 25 free research report alerts including:
-
FLASH Headline Alerts: Get an executive summary of the really important market-moving headlines
-
The “10.0” Report: These are the REAL Best of Breed companies
-
The Insiders Report: Want to know which stocks Corporate Insiders are buying heavily?
-
ETF Leaders Report: Don’t Miss TSP’s Weekly ETF Leaders Report
- TSP’s Daily TopStock Focus List: It’s Your Own Private Research Department
S&P 500 - Last 3 Months
