Bulls today are outnumbered only by those who think there are too many bulls. But the most widely anticipated correction ever may arrive a bit late, says investing editor Igor Greenwald.
After the decade we’ve all had, everyone’s wise to the market’s role as the trickster. Clearly, its job is to make us pull our hair and money out in whatever order inflicts the most damage.
Just because the S&P 500 is up 22% since August doesn’t mean Mr. Market’s lost his sadistic streak. It just means that in pursuit of maximum pain he’s opting to torture owners of saving accounts for now.
But with stocks building all this upward momentum, sentiment has obviously turned. Bullish sentiment as measured by the American Association of Individual Investors’ weekly survey peaked three weeks ago at 63% bullish and 16% bearish, prompting warnings of imminent stock-market doom.
The latest AAII poll was down to a less manic 52% bulls and 23% bears, but point taken: The long-term average is for 39% bulls and 30% bears. So, asked to render a market verdict in one of three flavors (neutrality’s an option), an unusually high proportion of investors continue to wear horns.
So do most of the Wall Street pros, a crowd that’s proven no more prescient than your average dart-throwing monkey. As Kelley Wright points out, some are predicting a return to the late-2007 glory days for the S&P 500 (though it’s worth noting that the Street’s average S&P target is all of 3% from where the index sits right now.)
But Is Anybody Truly Bullish?
Talk is cheap, of course. What are people actually doing with their money?
Well, according to the weekly estimates of mutual fund flows from the Investment Company Institute, domestic equity funds saw but a single week of inflows in the last five. It came at the very end of 2010, when $456 million came into this unloved category. The very next week, $4.2 billion poured right back out.
Does this sound that an overly loved market to you?
Is any pro or amateur out there not expecting a good-sized correction any minute? Rallies generally don’t power right through earnings seasons, and we’re on the very doorstep of one. By most technical measures, the buying stampede off November’s lows is terribly overextended.
And while every intraday dip this year has been bought, the more this goes on, the more the sellers with a low cost basis are replaced by weaker hands who are more likely to go into the red the first time the market throws a real tantrum. That’s the picture everyone’s looking at, because in the absence of long-term confidence, everyone’s a tactician these days.
And the tactical picture is looking none too attractive.
A Gotcha Inside a Gotcha
Remember that the market likes to take the path of maximum pain, so it could test tacticians’ confidence in their tactics. In strategic terms, buying stocks remains the contrarian play, the one more likely to pay off in the long run.
The S&P 500 is currently priced a bit below 15 times its estimated 2011 earnings. But if we assume that the valuation multiple goes up to 16.5, which is where it stood at a comparable stage of the last economic expansion in 2005, and that 2011 earnings outstrip early-year estimates by 12% as the 2010 crop has done, that puts the S&P above 1600.
That’s a couple of happy assumptions, for sure. But the math shows that index targets implying gains of 20%-plus this year are hardly outlandish fantasies.
A correction is coming, perhaps when more people stop waiting for one. With the economy improving, the latter stages of the countdown until the June end of the Federal Reserve’s bond-buying program could prove anxious ones, especially if interest rates continue to rise. But that’s then and this is now, when an imminent correction is on the tip of everyone’s tongue.
I wonder what Mr. Market thinks of that.
