August 17, 2012

Stock Market Crash Course: Stealth Rally

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Written By Chloe Lutts Jensen

In this edition of Stock Market Crash Course, the stealth rally continues, as noted by analysts including Stephen Leeb and Bob Howard. However, others are less optimistic, as reflected by sentiment surveys from Investors Intelligence and the AAII.

Chloe Lutts, Editor of Dick Davis Investment Digest and Dick Davis Dividend Digest

Chloe Lutts is the editor of Dick Davis Investment Digest and Dick Davis Dividend Digest, and the third generation of the Lutts family to join the family business. For each Digest, Chloe reads hundreds of investment newsletters to select the strongest ideas for her readers. Prior to joining the Dick Davis Digests, Chloe was a financial reporter for Debtwire, a division of the Financial Times, covering fixed income, and before that, she reported on global debt markets for Institutional Investor. She also has previous experience at Cabot, writing about growing momentum stocks for Cabot Top Ten Trader and high-potential small companies for Cabot Small-Cap Confidential. She holds a B.A. in International Relations from Brown University, and also studied in Beijing and Paris.

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[Transcript]

Stephen Leeb, Cash Cow, 8/15/12:

“Perception may be nine-tenths of reality, but right now there is a severe disconnect between how most people perceive Wall Street’s performance and how it is actually doing. Despite a lackluster second-quarter earnings season (replete with warnings on 2012 full-year numbers), the never-ending saga in Europe, and the political circus in Washington, the S&P 500 closed at its highest level in three months the day before we went to press. That, ladies and gentlemen, is what we call a stealth rally.

“A nearly universal impression persists among investors that the stock market is not doing very well. But it’s not founded in reality. In fact, the U.S. stock market is doing very well by almost any measure—the S&P 500 is up well over 11% so far this year, the Dow Jones Industrial Average is up nearly 9%, and even the NYSE Composite, one of the broadest market measures around, is up over 6%.

“The stealth rally in place since late spring is a picture-perfect example of the market’s discounting mechanism. Current events & problems, such as they are, are priced; right or wrong, the stock market is betting that they are manageable. If they’re not, a large disappointment looms that will take away a lot of the air underneath market averages. …

“But for now, the stock market is rallying. Stay long. Barring an accident, expectations are so low that the potential exists for stocks to work higher as we head into the fall.”

Bob Howard, Positive Patterns, 8/15/12:

“This has been a good year all in all for our accounts and I think because the NOISE and the SMELL is so bad out there many do not realize we might make 15% gains this year. … So, we will see, the one thing this market has got going for it is NO RESPECT FOR THE RALLY. I love that.”

John Gray, Investors Intelligence, 8/15/12:

“Indexes were up slightly on a weekly basis, with barely a change over the Wed-Mon trading. … Volume is very slow as many large traders are waiting for the widely anticipated stimulate measures from China, the ECB and the Fed to be implemented. Sentiment was also little changed with those professionals also ‘waiting to see’ with little reason for immediate action or opinion shifts.

“The bulls were unchanged at 43.6%, close to their level from the first week of July (44.7%) when the main indexes were trading at similar levels. That was up from 34.0% at the start of June when the averages traded down to their 2012 lows. However, they are still well below the above 50% readings from earlier in 2012, when the S&P 500 was last above 1400. The bulls should increase in number if the averages exceed their prior peaks, but for now they hold about midway between their 2012 highs and lows, leaving lots of room for additional gains. Overall sentiment remains positive until the bulls reach at least 50%.

“There was a small increase for the bears, to 26.6% from 25.5% last issue after some noted a stalling in the rally at prior highs. Some technicians also noted a lack of new individual stock highs, with recent readings well below the levels from early July and Feb 2012. Other bears remain skeptical for a solution to Europe’s fiscal mess or for strong U.S. growth, and are expecting the EU to collapse. …

John gray, Investors Intel, 8/16/12:

“On the positive side the main indexes all remain close to their recent highs, with 3%-5% gains since renewing their upside momentum on 26-Jul. Those advances have stalled as the 2012 peak levels achieved earlier this year were approached. The lack of any selling pressure is a good sign. …

“We still rate markets as bullish, with the uptrend intact and still more upside potential. Overbought readings are not yet broadly shown. Downturns after those levels are achieved will be the first danger sign.”

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