Where do You Think the Market’s Going?

Where’s the market going next? As usual, the answer depends on who you ask.

The latest sentiment reading from Investors Intelligence showed that newsletter editors are in their most bearish postures of the year. Bulls hit a new low for the year of 38.1% last week, the first reading below 40% since November 2012. That’s down from 51% bullish readings as recently as the beginning of August.

Meanwhile, bearish levels also hit a new high for 2013, of 23.8%. As Investors Intelligence Editor John Gray wrote:

“That is still below their November 12 peak of 27.7% but clearly some editors believe the bull market is close to ending its record run as far as time goes. Bears continue to point out that the removal of Fed support will drop the markets. If the bearish reading nears 30% a real broad buying chance may occur.”

His market timing indicators are still negative overall, however.

In today’s Investment of the Week, I want to give you a snapshot, in words and pictures, of this spectrum of market predictions, from the most aggressive bulls to the sky-is-falling bears. Going roughly in order from most to least optimistic, we’ll start with a long-term observation from Ronald Sadoff, Editor of The Major Trends. In his latest issue, he pointed to several factors that support the resumption of the bull market, including the one below:

“Here’s another powerful factor. A recent Gallup poll reveals that the percentage of Americans with money invested in the stock market is at a 15-year low.

“Only 52% have money currently invested in the stock market. A contrarian’s delight! Near market peaks, approximately 60-64% of Americans are invested in equities.”—Ronald Sadoff, The Major Trends, August 2013

There are shorter-term bulls too. In the latest issue of Global Dividend Investor, Jack Adamo argued that, despite arguments to the contrary, the current correction will soon end, and the uptrend resume:

“The market looks a bit weak in the short term. Moreover, some pretty good technical analysts think we may be in for a rough September. Nonetheless, despite consistently weak corporate earnings and a bull market that’s long in the tooth, there’s no sign of a market top yet. Hence, although I don’t know how long the market can keep running on empty, I suspect that the Fed-induced bull market will continue after a brief respite. If it does, we’ll start buying a bit more. If it doesn’t, that’s even better. We have plenty of cash to put to work if the market decides to take a header.”—Jack Adamo, Global Dividend Investor, August 29, 2013

Next, from the long-term bullish but intermediate-term uncertain camp, we have a chart and analysis from Jim Welsh, Editor of Forward Markets: Macro Strategy Review:

“The Major Trend Indicator (MTI) is a proprietary indicator we use to measure the strength or weakness of market rallies and declines. Whenever a rally carries the MTI above 3 (shaded area), it is a sign of market strength. The recent rally that peaked on August 2 pushed the MTI to +4.41. This suggests that after the current correction runs its course, the probabilities favor another rally.

“In June, we were fairly certain the S&P 500 would at least test the May 22 high. We are less sure now, since a rally back to the August high is more dependent in the short run on a reasonable decline in Treasury bond yields than the economy.

“Based on the chart of the S&P 500, we can identify important levels. The trend line connecting the low on December 31, 2012 and the low on June 24 comes in around 1620. If the S&P 500 breaks below that support, the next stop could be near the June 24 low at 1560.

“There also two other trend lines that converge around 1550. Should the S&P 500 fall to 1550–1570, the market would be oversold and likely find good support based on the June 24 low and these trend lines. As we have noted each month, since the March 2009 low, the S&P 500 has continued to make higher highs and higher lows, which means the long-term trend is up. This would change if the S&P 500 falls below the June low of 1560. We would also become concerned about the market, if the Major Trend Indicator failed to exceed 3.0 on a rally. The last time that occurred was in July 2011 and was followed by a 19% decline.”—Jim Welsh, Forward Markets: Macro Strategy Review, August 2013

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Lastly, we come to the most bearish end of the spectrum, where the advisors have plenty of good arguments for a serious crash. Here are Steve Hochberg and Pete Kendall, writing in the latest Elliott Wave Financial Forecast:

“Over the course of 2013, The Elliott Wave Financial Forecast has marked the steady onset of a classic stock market top. As various indexes and financial markets peeled away from the rising trend, EWFF and EWT ticked off a succession of all-time or multi-year extremes in one sentiment indicator after another.

“In another classic sell signal, the Nasdaq, which consists of higher-beta issues than the Dow Industrials, continued to press higher after the more seasoned Dow topped on August 2. The Nasdaq Composite’s high came on August 5, while the NASDAQ 100 held up until August 13. (The Nasdaq 100 large futures contract peaked still later, on August 26.) The same topping sequence occurred in the first quarter of 2000: The Industrials peaked on January 14, followed by the Nasdaq Composite on March 10 and the Nasdaq 100 on March 27 (closing basis). As the mania for technology shares climaxed in March 2000, EWFF identified the divergence between these indexes as a ‘transgression’ that happens ‘only late in long-term uptrends. The resulting carnage resembles what happens in a real war when the generals abandon the fight.

This is a bearish sign for the overall market, including the Nasdaq.’ Over the next 18 months, the Nasdaq Composite fell an astonishing 78%.

“In October 2007, the Dow Industrials made its closing high on October 9, a full 21 days ahead of the Nasdaq’s high on October 31 creating the same sequence just before the Dow and S&P fell more than at any time since 1929-1932. The setup this time is nearly identical.

“In an added bearish twist, the Nasdaq 100’s lone new high on August 13 came as corporate raider Carl Icahn announced that he had purchased $1 billion, or 5%, of Apple Inc.’s outstanding shares and immediately called for the firm to borrow money to buy back more of its own shares. Apple had already unveiled the ‘largest share-repurchase program in corporate history’ in April, so Icahn’s proposal seems to reflect a pinnacle of optimism. Our chart of U.S. stock buybacks in last month’s issue shows how this has already pushed the total value of buyback announcements in 2013 to a new all-time high. As we noted then, ‘this is reckless behavior, borne of an aged advance.’ History shows that it happens at important stock peaks, when investors are confident the bull market will continue.

“The sentiment response to the market’s initial thrusts lower supports the case that a top is in place. As the gathering storm clouds gave way to the storm itself, ebullience actually surged higher in some quarters. Back in April, EWFF showed a chart of predictions from trend-following Wall Street strategists, showing their knack for issuing record-high price projections at important market tops. They were at it again on August 8, six days after the S&P and Dow completed their rallies. … Of course, there’s just no way to talk down a bubble gently. The Nasdaq’s 78% nose dive right after EWFF introduced the uh-oh phenomenon in March 2000 amply demonstrates its effectiveness as a signal. The current version is louder than ever, so the next decline will probably be correspondingly noisy.”—Steve Hochberg and Pete Kendall, Elliott Wave Financial Forecast, August 29, 2013

Across the spectrum, these analysts have good evidence for their arguments, and many have persuasive historical comparisons as well.

Of course, they can’t all be right.

What do you think? Was the August correction the beginning of a new bear phase, or was the market just taking a breather before rallying through the end of the year? Let me know by replying to this email.

Wishing you success in your investing and beyond,

Chloe Lutts Jensen

Editor of Investment of the Week

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