Anytime the broad stock market indexes (a la Dow Jones, S&P 500 and Nasdaq ) rally more than 80% in two-year span it shoud be concerning. I think the last time this happened was in the 1930s. So there is plenty of fodder for the bears who thinks stocks will crash. However, for some reason investors continue to expect that the sky is the limit for stocks.
It’s lonely being a bear, but when it comes to investing right now that may be the best way to protect your money. Here’s why so many people are hating on the bears — and why they should listen up to what we have to say:
Reasons for Denial
I’d like to be a bull, but being a bull would have gotten me burned three times already in the past decade. In 2000 it was a bursting tech bubble. In 2006 it was a tumbling real estate market, and in 2007 it was the financial spill that flooded the system.
Being a bear wasn’t wrong back then, and today it feels just like 2000 and 2007 all over again. Ok, there are a few major differences.
Unemployment is higher today, much higher. For much of 2000, the unemployment rate was below 4%. For all of 2007, unemployment was below 5%. Today, unemployment is still close to 9.4%.
It’s not just the cold hard unemployment numbers that concern me, it’s the negative feedback loop created by a lack of jobs. Jobs are money. Without jobs there’s no money, without money there’s no economy.
Without consumers willing to spend, there is also no real estate recovery. If there is no real estate recovery, how will banks deal with all the toxic assets on their balance sheets? Yes, for right now banks have been able to hide bad assets with accounting tricks and the help of the Fed, but how long can the inevitable be postponed?
It seems like no one really cares that the FDIC shut down 157 banks last year, mostly regional banks along with three of the biggest whole sale credit unions.
Don’t Worry, Be Happy
“Well, you shouldn’t worry about all this, nobody else does. Mr. Bernanke and his team are taking care of matters. You just have to trust them.”
“You mean trust them like in 2000 or 2007, or even in the late 1920s.”
“No, this time it’s different.”
“Isn’t that what you bulls say every time before the market crashes? It seems to be different every time, yet the outcome is the same – investors get hurt.”
“No, this time it’s really different. Haven’t you looked at the government deficit? It’s at an all-time high, which means the Fed is doing everything they can, even more than in the past. Even bad news is good news because it brings us one step closer to another round of quantitative easing (QE3?).”
“Sorry, I forgot about the bad news boost. If QE works, why do we need a second round of it? If QE works, why did Ben Bernanke appear on 60 Minutes in an attempt to explain how dismal the recovery is?”
Abandon Common Sense
“As I told you – don’t worry about that. People think more QE will do the trick, that’s all that matters. Look at prices, they are going up, whether you are a bear or not.”
“I can see that, but …”
“Shush, nobody wants to listen. Nobody does listen. We are in a bull market, just face it. That’s why stocks have been rallying for months.”
“I can see you are pretty set on being a bear. Have you always felt this way?”
“No, in fact I was one of the first to say BUY in March 2009. Via the March 2nd Trend Change Alert, the ETF Profit Strategy Newsletter issued a strong buy signal and predicted the biggest rally since the October 2007 all-time highs. We gave Dow10,000 as upper target range. I was bullish when nobody else was. Now it seems like I’m bearish again when no one else is.”
History, does it matter anymore?
It’s lonely and tough being a bear. Who likes to swim against the current when it’s so much easier to float downstream? But historically, a near unanimous consent that stocks will move higher usually results in a move lower.
We saw this play out in April 2010 when optimism and confidence in higher prices were running at fever pitch. On April 16, the ETF Profit Strategy Newsletter noted that: “The message conveyed by the composite bullishness is unmistakably bearish. The pieces are in place for a major decline.” Following the April 26 peak, stocks declined some 20% within a matter of weeks.
On July 5, when the S&P 500 futures traded as low as 1,002, the ETF Profit Strategy Newsletter noted against a backdrop of ueber-bearishness that: “The S&P is butting against the 100-week SMA, lower accelerations band, 38.2% Fibonacci retracement level, round number resistance at 1,000 and weekly s1 at 994, there is a good chance we will see some sort of a bounce develop from the 990 – 1015 area.” The S&P bottomed that very day and hasn’t looked back since.
Quantitative Easing is investors’ best (fair-weather) friend. Even though the release of QE2 has brought with it a spike in interest rates and drop in bond prices, it has propelled stocks. Against popular opinion, the release of QE2 coincided with a U.S. dollar bottom. A strengthening U.S. dollar doesn’t generally bode well for equities.
QE2 – vs. The Market
Will QE2 be enough to keep stock prices going up or at least prevent them from going down? There are no historical precedents except for one – Japan. Japan has been battling deflation and falling prices for over two decades. The Nikkei had a hand full of 50%+ rallies since its 1989 slump, nevertheless it remains 80% below its peak.
Investment daredevils may continue to enjoy the thrill of QE2. If you are thinking that things seem to good to be true, you may want to consider protecting your gains. The ETF Profit Strategy Newsletter continuously monitors the vital signs of the market and recommends when and how to protect your portfolio.
Who knows, denial might not be such a bad thing, after all, an ounce of protection is worth more than a pound of regret.
This article is brought to you by ETFguide.com, and was written by Simon Maierhofer. ETFguide is the information leader on exchange-traded funds because of its vendor-neutral approach and its progressive reporting style. Unique features include an ETF bookstore, a monthly e-mail newsletter, and subscription based ETF portfolios.