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Bulls v bears: is all the bad news priced into shares?

Are the bears missing a strong buying opportunity or is false optimism bringing the ‘ice age’ closer?

 
Bulls v bears: is all the bad news priced into shares?

The almost universally bearish sentiment that has held sway in recent months is starting to give way to more bullish noises in some quarters as several indicators point to equities being severely oversold.

Against a backdrop of concerns about the eurozone and slowing growth around the world, markets have fallen sharply over the last three months, wiping out gains made earlier in the year.

The MSCI World index is down -9.79% over the last quarter, while the MSCI Asia Pacific and Europe indices have posted double-digit losses over the same period.

Bad news in the price

But a number of investors are now backing equities with a view that risks are now more skewed to the upside with so much bad news now priced in.

Chris Watling, chief executive and chief market strategist of Longview Economics, is recommending clients ‘start to build overweight equities positions in non-eurozone stocks’.

‘While risks clearly remain, we expect the euro to survive this year, especially if as currently seems likely, the Greek exit does not happen,’ he says.

‘Over and above that, a US policy response to its macro weakness, is increasingly likely and imminent. In order to manage ongoing risks, we recommend a modest overweight at this juncture – with that expected to increase if equity markets weaken considerably from current levels.’

Watling says through May the group’s in-house modelling tools all started to point to ‘buy’, including its short and medium-term asset allocation scoring system, which aggregates around 20 indicators, and its risk aversion monitor.

Live dangerously?

Indeed, investors have become so bearish that Longview’s monthly risk appetite is at its lowest point in over a decade, equating to a strong buy signal.

‘Global equities are oversold at two standard deviations,’ says Watling. ‘The case for buying equities continues to build.’

Jeffrey Saut, chief investment strategist at Raymond James, points out other technical indicators are also flashing green. He noted that last week the Dow Jones Industrial Average, the S&P 500 and the Nasdaq all fell below their respective 200-day moving averages for the first time in around five months.

‘The bears will be quick to point out this is what happened right before the crashes of 1929 and 1987,’ he says. ‘However, the bullish argument is that over the past 20 years, a break below the 200-day moving average by the S&P 500, after it has stayed above it for three months, has typically led to a rally. And despite the break below my 1,290 pivot point, I can’t shake the feeling that all of this is just part of the bottoming process.’

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7 comments so far. Why not have your say?

snoekie

Jun 20, 2012 at 17:02

I do not believe that the market currently reflects what is coming down the track.

Europe continues to fiddle faddle, using paper patches with weak glue for serious wounds. The US is drifting, with no ability to address their Everest like debt mountain.

I seriously expect the FTSE to be sub 5000 during the course of the latter part of this year and given the enormity of the task in rebuilding the balance sheets of the respective nations, not to mention the majority of the European banks because of the loans that they have made to Greece, Spain, Portugal, Ireland, Italy, France etc many are going to take big hits requiring bailouts. Sitting on top of this pile of manure is Germany and even her banks are going to suffer.

So, there is not going to be a lot of money around for the stimulus that is going to be required and at best many companies are going to tread water for the next 2 to 3 years. In the meantime the price of basics is going to rise because of counterfeiting by various governments to make up for the fraudulent notes/money in circulation.

What surprises me is that the market is so gullible that as soon as somebody mentions a little bit of money being splashed around, they shoot up. This money is borrowed money, and has to be repaid and there is going to be little that the banks can do to assist industry because of their trying to balance their books and bolster their balance sheets.

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joe stalin

Jun 20, 2012 at 17:49

The hedgies are selling bonds like they are going out of fashion so there is a good chance the worst is behind us and Europe will continue to grind towards a solution.

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Geoff Downs

Jun 20, 2012 at 20:18

Grind towards a solution, what solution is that then?

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JohnnyM

Jun 20, 2012 at 21:10

The markets are still over-priced based on future earnings growth, except that FTSE100 companies have managed to increase profits at the expense of people-loss, and therefore should be less of a risk: they are also no guide to the bigger picture. Papering over the cracks - which reappear after 12 hours - is an accurate description of the Eurozone, but they all daren't tell their electorate the real inevitable truth - Goodbye Germany, France, Italy, Spain, Greece, Portugal, . ..... Hello the Country of Europe!

No more Vive La France, No more Deutchland uber ales. Because they don't understand. They no longer will have the right to determine their own Political or Taxation system. That's it, folks!

But I believe this will take 10 years of hell for the developed world - if West vs East war is avoided, which is doubtful - before the European citizens will be ground down into submission.

A sad, and depressing picture for all of us over the next 10 years, but I don't see ANY other politicians or other powerful players actually DOING something about it: No, their role is to TALK - not DO.

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Anthony O' Grady

Jun 20, 2012 at 22:07

First thing to say is that predicting major moves in markets is a fool's game. That said, Jeremy Grantham from GMO reckons that markets could halve from here, and Mark Faber is predicting an event towards the end of the year similar to October 1987.

In the long term (having already endured a horrid decade for equities) I am certain that some companies now represent outstanding value, even if they have further downside in the short term. However people can be forgiven for being cautious, and those comments from people whose living is inexorably entwined with a robust equity market should be taken with a large pinch of salt.

SAFETY FIRST FOR NOW!

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Pilgrim

Jun 21, 2012 at 10:17

The historic behaviour of markets may provide some evidence of irrational bullish or bearish trends but it does not provide a reliable guide to the future economic prospects of Nations.

Britain today differs in almost every respect from historic Britain. In historic Britain most manufactured goods were from internal suppliers, and the raw materials used derived from Britain's own rich mineral deposits or from colonial resources where Britain controlled the terms of trade. That is our history.

Today, our manufacturing capacity has been substantially eroded, whole industries have disappeared only to be replaced by foreign suppliers. The tied trading relationships with colonies no longer exist. The British Empire created enormous wealth and power but this has now largely been dissipated.

Whereas in post-war Britain the overwhelming thrust was to improve Britain's balance of trade in the hope of a surplus in manufactured goods & invisibles. Today, it seems we measure our economy in terms of what we consume not what we produce. The world in which we find ourselves is one in which the rapacious pressure of humanity is depleting resources and harming the environment at an unsustainable rate.

Our economic engine has changed past recognition. Why should we expect it to drive markets as it did in the past? It is not a continuum but a part of an complex evolving process. There will always discreet opportunities available, but in general it is difficult to see a trend favourable to the interests of 60 million Britons. In current parlance, we lack a killer app!

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Jn

Jun 21, 2012 at 11:25

The fact is no has a crystal ball. Just be cautious and sensible.

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