Lingering fears are a bullish sign
Investors continue to worry about the economy and the markets, and that's good news for stocks.
Stocks have continued to rebound from the correction that began in late April, with the S&P 500 and Nasdaq up about 12% and 15%, respectively, over the past seven weeks. And, according to several top market gurus I keep an eye on, there's still more room for stocks to run.
A big reason: Despite the recent gains, sentiment
remains muted. In his latest MarketWatch column, for example, Mark Hulbert says
that while the market is trading at almost the same level it was back in late
levels are much lower today -- a bullish sign.
Hulbert says the average
recommended equity exposure of a subset of short term market-timers he tracks through
Hulbert Financial Digest is just 25.9%
-- down from 65.5% when the market was peaking back in late April.
"In other words, the average stock market timer today is less than half as bullish as he was in late April," Hulbert says. "Since the usual pattern is for advisers to become more bullish as the market rises, and more bearish as it declines, the current low level is quite surprising -- and bullish."
Hulbert says these types of market timers are likely to jump back into stocks if and when the market surpasses its April highs. "Don’t be surprised if the market thereafter turns in a few explosive days on the upside,” he says.
Top value fund manager Bill Nygren also thinks negative sentiment is creating a major bullish case for stocks. In his third-quarter market commentary, posted on Morningstar this week, Nygren says that "many investors are projecting slow or no growth for the economy and therefore slow or no growth for S&P 500 sales and profits." That's off the mark, he contends, saying that companies have hordes of cash on their balance sheets, and that they’ll use that cash to their advantage even if sales and profits don’t rise as much as people would like. Two major ways they'll do so, he says: increased dividend payouts, and share repurchases, both of which should benefit shareholders.
“We continue to believe that equities are attractively priced and are highly likely to dominate returns from more popular assets such as fixed income,” Nygren says. “Flows into bond funds continue to be abnormally high while equity funds experience outflows. We believe that investors have it backwards."
Another top strategist, David Herro -- who was named one of Morningstar's fund managers of the decade -- thinks investors are focusing too much on macroeconomic fears. “People are afraid to stay focused on the fundamentals, so they are going to the macro,” Herro tells Morningstar. “The problem with that is the macro changes like the wind; it’s like the weather. There are so many variables, there are unstable coefficients, and people get whipsawed.”
The macro focus has created some big opportunities, Herro says. For example, investors fled Spain-based Banco Santander (STD) earlier this year amid Spain's debt crisis. But Santander gets less than a third of its revenues in Spain. "A lot of the firm's profits come from Brazil, Mexico, the United Kingdom, and even to some degree the United States," Herro said. "But … because of the weak macro conditions in Europe, people all of a sudden just want to flee European financials, without even looking to see where these companies actually earn their money."
Money managers and columnists Whitney Tilson and John Heins, meanwhile, say they are finding a number of opportunities to both buy and short stocks, thanks to an odd sort of dichotomy that has developed in the market. Writing in Kiplinger's magazine, they say investors are “torn between wanting safety and craving yield”, and thus are piling into low-yield Treasury bonds while at the same time pumping cash into riskier emerging markets and junk bonds. Left behind: big, solid blue chips that are selling on the cheap. "Many of the least-risky blue-chip stocks are extremely cheap, while the shares of some firms with less-predictable or speculative prospects are expensive,” they say.
Finally, another top strategist, Barry Ritholtz, offered this advice: Don't fight the Fed. Ritholtz told Yahoo! TechTicker that “you can’t really be short a market where the Fed is saying we’re going to do whatever it takes to hold up every asset class." Ritholtz says he has a little over half his portfolio in stocks, and is slowly adding to positions. He likes stocks from high-growth areas like Chile, Korea, and Brazil that trade as American Depository Receipts, and high-dividend telecom plays. He's also looking at some contrarian-type picks in the homebuilder and technology areas.
John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".
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3 stocks will be in the spotlight Thursday as investors try to make sense of the numbers from the sector.
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