The Time for Bearishness Has Passed

A reader, Minyan P, writes:
 

Kevin,

As you may be aware, some market forecasters are viewing the actions of the past couple of days as something akin to "The Last Days of Pompeii." All of the DeMark qualifications still read like a foreign language to me, but it feels like your DeMark indicator readings are in contradiction to that. Am I reading you right?

Using monthly range projections, the probabilities are right now that we close above the monthly projected highs for INDU, SPX, UKX, NDX and RTY.

The Nikkei has recorded a TD Sequential 13 buy signal on the monthly chart.

The S&P 500 cash index daily chart is coming off a DeMark TD Sequential buy signal.

In general, the weekly charts have all held critical TDST Down levels (a measure of trend) with the one exception being the Nasdaq Composite. One interpretation is that this index is a canary in a coalmine of sorts, but another way to look at it is that the sheer number of stocks in that index are making it look weaker than the rest of the market as breadth remains fairly weak, typical of the end of a secular bear market.

Meanwhile, the range has tightened for SPX. We're now in a range of 1165 to 1095 and have been very volatile trading through those upper and lower levels so far without qualifying breaks of that range. Because of the consecutive up closes we cannot break the top of that range today or next week until we have a down close. But we're getting closer to possibly making a decisive move.

The probabilities, based on my interpretation of the DeMark indicators, are that the move will be to the upside.

As mentioned on the Buzz and Banter (subscription required), I'm more optimistic right now than I've been in 10 years based on a combination of things: DeMark indicators, sentiment, general apathy and cynicism, etc.

A friend of mine on Friday, after the jobs report, said he couldn't remember a time when he was more right about the macroeconomic data and more wrong about stocks. I wanted to point out to him that you can't buy or sell stocks based on the economy. In the real economy things are very bad and will get worse for the foreseeable future. In the early 1980s, I remember my father, an independent pharmacist, struggling to make ends meet as the economy took a toll. It was tough. My mother even went back to school at that time so she could find work. But the stock market was booming. Stocks are not the economy.

Let's look at it another way. What if in 1999, with the Nasdaq at 3500 or so, I told people that over the next few years we'll see the following:

1. The dot-com bubble will burst;

2. Stocks of companies that didn't go out of business will cut in half;

3. The first wave of a credit collapse will begin with the bankruptcy filing of a major telecom provider;

4. Terrorists will destroy the World Trade Center and try to destroy the Pentagon;

5. The US will wage a war on multiple fronts in both Afghanistan and Iraq;

6. Iran will develop nuclear weapons;

7. Oil will triple in price;

8. Real estate will collapse causing home prices to decline nationally by 20% or more;

9. At least three major banks that among them have been around more than 300 years and which employ 100,000 people worldwide will collapse;

10. Fannie Mae and Freddie Mac will be placed in conservatorship;

11. General Motors will be purchased by the US government; and

12. Gold will rise from $200/oz to more than $1,200.

I could go on, but the point is that all of that has already happened. My opinion is that the time to be bearish has passed. It's time to move on and prepare for something different.

It's now universally accepted that a "black swan" trigger event will cause things to collapse even further. Perhaps. But I have my doubts. I believe a "black swan" at this point is more likely to be an unforeseen positive catalyst. Remember, a "black swan" is not by definition a bearish event, just an unforeseen event.

The reality is I don't know what will cause companies to hire again, or profits to improve, or stocks to go higher. But having endured all that we have for 12-13 years now, and being unable to find any positive content about financial markets in either the media or even among hedge funds and strategists (sell side excluded), I think we've seen a pretty good bear market.

Make no mistake, I'm early in this and we probably still have further downside to go, but people are already protected and shielded
against that. Most people are either out of stocks and in bonds, or just out of financial markets altogether.

If I thought we were going to see a societal collapse of the magnitude some forecast, I wouldn't be writing this content, but actively looking to move my family somewhere safe. I may wrong, but I'm putting my money where my mouth is, literally, by staying here. Only time will tell, but the pessimism right now is deep and entrenched. This is the polar opposite of the entrenched bullishness in place prior to the debt crisis and real estate crash.

In 2004, at Minyans in the Mountains in Crested Butte, after my presentation a number of people were polite in saying they appreciated it but that they thought I was wrong to be so bearish.

In 2007 Todd Harrison and I attended a CNBC banquet at the Mandarin Oriental hotel where Maria Bartiromo presented Alan Greenspan with a Lifetime Achievement Award. Yes, just let me repeat that so it sinks in: In 2007 Todd Harrison and I attended a CNBC banquet at the Mandarin Oriental hotel where Maria Bartiromo presented Alan Greenspan with a Lifetime Achievement Award. Barely a half hour later, we're standing in the reception area where we strike up a conversation about real estate with senior economics reporter Steve Leisman. I told him I thought home prices would eventually fall by 20% or more on a national level. He disagreed. But I don't mean he just said, "I disagree." He said, "You're crazy." And he meant it. The point is not that Steve Leisman was wrong. For all I know he changed his mind the next day. The point is that entrenched bullishness produces responses such as "you're crazy." Entrenched bearishness works the same way, only from the other extreme.

If the end of this bear market is typical (and I believe it really will one day end), then after the mean reversion bounce that took all stocks higher in 2009, there will be individual stock advances that occur beneath the major indices, and those who are selective will outperform the broad market while the Greenspan years of capital misallocations get sorted out. Apple (AAPL) and Goldman Sachs (GS), for example, strike me as poster children for the kind of stocks most likely to underperform in the coming years.

My strategy is to be selective in stocks, and over the next couple of years, slowly reduce cash holdings in case I'm horribly misguided
in my burgeoning optimism. I have no need to use leverage because I've been well-protected over the past decade.

I may be wrong about all of this, but the only people who need to seriously worry about being wrong are people who make all-or-nothing bets. The market doesn't have to be all or nothing. I'm less concerned about the S&P 500 going to 400 than I am with how long it will stay there if it does go to 400. A week? Two months? A year? Then what?

People love to predict them some crashes, boy. They just love it. I know I do. It's exciting! Capital loss is so psychologically damaging, even if the loss is only temporary and for a few days, that those who call for crashes are like rock stars. But no one likes to talk about what happens after the crash. Why? Because it's so boring.