There's a lot of debate about whether stocks have hit bottom or whether those up days were all just a head fake rally. Today's action makes you wonder. The financials, acting better on up days, are the worst performers today, and those safe haven utilities are the best performers.
Also falling are homebuilders and retailers. The Dow has been slogging around in negative territory all day after last week's big bounce up.
Merrill Lynch's chief investment strategist Richard Bernstein made an interesting case today for his view that the market has not yet seen capitulation. In fact, stocks may in fact be just half way through a bear market, he says.
According to his sentiment indicators, Bernstein does not yet see "extreme pessimism," which he says is necessary for capitulation. In a note, Bernstein says his sell side indicator shows pessimism is growing though.(He also says that investors are underestimating the global impact of the unwinding of the credit bubble.)
Bernstein says he believes the "sell side" indicator is the most reliable market timing barometer. It is a survey of Wall Street strategists' recommended asset allocations and works as a contrarian indicator.
Right now, his sell side indicator is reading 60.4 percent, down from last month's 61.2 percent. Any reading at or above 63.8 percent, generates a sell signal, and a reading at below 51.5 percent or less is a buy signal. The indicator has fallen significantly in the past six months indicating investors are becoming more conservative but in a historic context, they are still relatively bullish and risk-oriented.
Bernstein wrote: "Although the recommended equity allocation has decreased (which indicates increased pessimism,) we find it hard to argue that there is extreme pessimism when Wall Street is not even recommending an underweight of equities."
Here's something else to watch as the credit crisis unwinds. A Federal Reserve survey released today shows that banks are tightening credit standards for consumer and business loans, at the same time loan demand is weakening. In fact, 80 percent of the banks surveyed tightened standards for commercial lending, the highest level since 1990.
Not a surprise. The survey was taken before Jan. 17 and before all those big Fed rate cuts.
The survey found that a large majority of domestic and foreign banks expect a deterioration in loan quality in 2008, affecting businesses and consumers. Also 55 percent of the banks reported that they tightened their lending standards on prime mortgages, up from about 40 percent in November. Also 60 percent say they are tightening lending standards for home equity lines.
For business lending, the banks cited a less favorable or more uncertain economy, worsening industry specific problems and a reduced interest in risk as the reason for tighter lending.
By the way, I spoke to Bernstein about two weeks ago and he told me at the time that the current bank environment is similar to the period of constricted lending in 1989 to 1990. That period lasted about a year. At the time, bank balance sheets were shrinking as they took big writedowns and that limited lending. Sounds familiar.