Contrarians in the Cold as Bulls Keep on Buying
Contrarian investors are rapidly becoming the Maytag repairmen of the stock market.
Remember the old commercials? The sullen maintenance man, left standing alone in a desolate workroom, unable to do his job because none of the eminently efficient machines were breaking down?
Such is the position of the market contrarians.
Normally, they’re only too happy to jump into the fray when the market moves too much in one direction. Everybody wants to sell? Great, they happily step in to buy cheap. Everybody wants to buy? Great, they gleefully start pressing the sell button and reap the profits they’ve accumulated when stocks were on sale.
But the traditional contrarian buy signals aren’t operating like in the olden days.
Market sentiment surveys have been roaring positive, well past normal contrarian sell indicators, yet the market keeps pushing higher.
The VIX? Fuhgeddaboutit. The so-called “fear” indicator has been flashing “complacency” for ages, yet there has been nary an opportunity for the buy-on-the-dips crowd in a good six months.
So what’s a contrarian to do?
“Gotta go with the flow,” says Dave Lutz, managing director of trading at Stifel Nicolaus. “You know me: If everybody is on one side of the boat I like to be on the other side. But it’s just too hard to do with all the flows coming in.”
Indeed, stock inflows seem to be creating a vicious tide against which even the most skillful swimmer dare not plunge.
After an eight-month run of outflows to US equity mutual funds, the group is on a five-week winning streak, racking up an impressive $4.9 billion gain in the week ended Feb. 9, according to the Investment Company Institute.
While a 1-to-1 comparison is difficult to draw with any degree of certainty, it appears domestic stocks are the beneficiary of the scare drummed up against municipal bonds. Munis have seen eight straight weeks of outflows, the most recent being a $1.47 billion dump even as their taxable counterparts continue to see inflows. Regardless of whether Meredith Whitney is right on her bleak forecast for munis, investors clearly are paying attention.
In the meantime, the drumbeat goes on for the feel-good aura around stocks.
The American Association of Individual Investors survey—a sentiment poll of average market folks, the methodology of which has its critics—has shown majority bullish sentiment for 24 weeks running. During that time, the Standard & Poor’s 500 has jumped a mind-blowing 23 percent.
Though the AAII poll is, according to most market mavens, a solid contrarian signal, you’d have lost big betting in that direction for the last six months.
Same for the Investors Intelligence poll, which primarily surveys investor newsletters. The poll last showed bulls with a 52.2 percent to 19.6 percent advantage over bears and hasn’t been majority bearish since last fall, when the most recent leg of the 23-month rally began.
“Bulls have been completely vindicated week after week,” Rick Bensignor, chief market strategist at Dahlman Rose, writes in his daily market analysis for clients. “The occasional minor market hiccup has done nothing to alter their stock consumption habit.”
So what will get the contrarians back to work?
The Federal Reserve has set the tone for the stock market with its easy-money policies. The Fed’s Treasury-purchasing program is putting capital squarely in the hands of the big boys who control the markets. The at-least tacit quid pro quo the two sides seem to have—as long as the quantitative easing skids are still getting greased—seems an unstoppable force, at least until the bills come due for all that debt.
One metric to watch could be an alternative volatility measure, the iPath S&P 500 VIX Mid-Term Futures , an ETN that tracks rolling VIX options on a five-, six—and seven-month basis, a timeframe that coincides with the supposed end of the Fed’s QE2.
The measure has been showing a break higher from the VIX and could be signaling that the train stops as soon as the Fed blows the whistle.
Until then, though, contrarians are likely to be just as lonely as the poor guy from Maytag.
“Thus, we basically stay the course…of keep what you’ve got, and do some selective buying of previously forgotten-about names,” Bensignor told his clients. “But with a finger not too far away from the ‘Sell’ button.”
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