Tough Roller Coaster
Aug 31 2010 - Mike Williams - Bull VS. Bear
Good Morning
First and foremost, we wish you and yours a safe, enjoyable and relaxing Labor Day weekend break. Be careful out there, try to relax and make sure you spend quality time with your families!
With the exception of a few video updates that I promise will be posted for you later tonight, this will be the last morning update this week. They will start up fresh again on Tuesday of next week. Keep in mind that the haze will not likely wear off on the Street until mid-month.
Insiders are In
Often, at critical points in emotional swings for the markets, we update the insiders viewpoints. The latest data are out and show that insiders are now selling their shares at the lowest levels since the March 2009 lows.
One company that gathers and analyzes the SEC data is Argus Research, whose findings are published in the Vickers Weekly Insider Report. Each week, Vickers calculates a ratio of the number of shares that insiders have sold over the previous week to the number that they have purchased.
According to the latest issue of this service, published Monday afternoon, insiders in the week ending last Friday sold 1.02 shares of their companies' stock for every one than they bought. The resultant sell-to-buy ratio of 1.02-to-1 is well below the long-term average of between 2 and 2.5-to-1 -- and solidly bullish.
In fact, Vickers notes, this latest week represents the third in a row in which the ratio has fallen.
To put the recent week's reading in context, consider that the insiders' sell-to-buy ratio at the market's low in early July stood at 1.58-to-1. At the early June low, the ratio only got as low as 1.26-to-1.
To find a sell-to-buy ratio that was any lower than the 1.02-to-1 from last week, in fact, you have to go back to the week that ended April 3, 2009 when the Dow was 3000+ points lower.
This would all coincide with the continuing run of very bearish AAII sentiment (contrary bullish) and the massive runs on mutual fund capital. Outflows have been the norm for months now as covered already in previous updates.
Add it all up and you get bullish implications. That means little this week as I suggested last week. Of all weeks in the summer, the bears likely win their game this week as prices will be hurt by few buyers and little or no confidence. This all hints at the idea that we are once again testing the lower end of this mind-numbing trade range.
Muddling Along
I recognize this gets rather monotonous at times but the fact remains we are witnessing a muddling process that is a required element. One cannot expect a massive recovery to all happen at once. Every part of the economic chain was shocked and we are coming up on the 2-year anniversary of the onset of same. As such, we should be happy that we have seen as much be put back together as we have. However, there is much more to do and expecting it to happen overnight in the first error.
That type of thinking will drive one to conclusions that, over time, will likely prove incorrect. Later would be a bad time to figure that out.
Is There Any Good?
Sure there is.....earnings are approaching old highs, P/E's are approaching old lows, personal incomes are hitting highs (if employed), productivity rates are exploring new highs, margins are accelerating, cash is everywhere by the truckload and sentiment is in the tank.
ALL of this argues that if we go to sleep for the next 24 months and pay attention to other elements of the investment landscape instead, we are more likely to be very pleased with our gains. On the other hand, if we pay to much attention to every headline and economic detail, we are likely to be dissatisfied.
I am sorry, but that is the way it is.
Some Good Stats?
The Bears can growl about all the weaker-than-expected economic indicators released during August. While they are waiting for profits to follow suit, they are winning the valuation battle, as the market’s P/E continues to decline.
The Bears also have won the hearts and minds of the investing public. Actually, as covered earlier, the public is no longer investing in stocks, but rather in bonds.
So far this year through July, bond mutual funds have attracted $224.4bn in net inflows including reinvested dividends. Equity funds have attracted almost zero net dollars with $32.2bn going into International funds while $33.0bn flowed out of Domestic funds. Expect those numbers to get even worse once we get August data released.
Important: Again, from a contrary perspective, one of the risks for the Bears is that there are way too many of them in the equity market matched with far too many Bulls in the bond market.
You see, these are the markers of the next surprise. As is the case at all major lows, however, reading tea leaves daily does one little good. These are long-term events unfolding and they require an inordinate amount of patience.
Things nearly always look obvious at extremes--right?
More inside.