Investors have been liquidating bonds in the last few weeks which begs the question why. Are investors liquidating bonds in order to move cash back into stocks and other risk assets? Or is that money going under the mattress? On that score a recent news article provides a most interesting backdrop to this question.
On the front page of a recent edition of USA Today was a splashy headline that immediately caught my eye: “GET BACK INTO STOCKS.” I did a double take when I saw this headline and the contrarian in me immediately thought, “Uh oh, there could be a major top at hand,” especially with an ultra-bullish headline like this in one in the nation’s most widely read newspaper, no less. After a balanced reading the article, however, there are two conclusions that I think can be made here.
The article features an interview with five top Wall Street analysts, including the famous Abby Joseph Cohen of Goldman Sachs. These analysts were unanimous in their belief that 2011 will be a bullish year for stocks and bearish for bonds. They advised investors to begin shifting some investment dollars out of bonds and back into stocks after two years of assiduously avoiding the equities market. The five analysts forecast an average gain for the S&P 500 next year of 15%.
The five analysts interviewed by the newspaper gave various reasons for expecting another year of out performance by equities in 2011, including a stronger dollar, an improved economic outlook, corporate earnings, etc. It more or less amounted to a linear projection of a pre-existing trend and one that has been underway for two years already. In other words, it’s pretty typical of Wall Street to come out after an uptrend has been well established and start waving the bullish pom-poms.
Many investors will undoubtedly react to this bullish headline in knee-jerk fashion and assume it reflects a major top in the stock market. To do so, I believe, would be both premature and potentially dangerous. Yes it’s possible that maybe this headline does mean stocks have essentially priced in all the good news on the recovery and have topping out ahead of a major correction. But I strongly suspect that this headline represents not the end of the cyclical bull market, but the beginning of the end.
Throughout these last two years of our participation in the cyclical recovery we’ve talked about how the stock market turnaround has been largely fueled by the big Wall Street firms, including the hedge funds. The retail investors has had only a minimal participation in this 2-year recovery rally and most small investors have seemed content to leave their money parked in low-yielding money market funds. Many of the big Wall Street players are loaded to the gills with stocks and they eventually have to have someone to unload on. That’s where the public comes in, the same public that has been firmly ensconced in the bomb shelter known as the bond market. Viewed from this perspective, the USA Today article is a tip off that Wall Street is making serious efforts at courting the public and stoking their interest to get back into stocks. Wall Street didn’t bother enticing the public back into stocks in 2009 and 2010, which would have been a lost cause due to the high level of residual fear following the credit crisis. But now that the harsh memories of the credit crash are becoming less vivid and the public has clearly grown tired of receiving virtually no return on its investment funds, stocks are being trotted out as the investment du jour by the Wall Street publicity machine.
It doesn’t take too much imagination to see the wheels turning in the mind of the typical retail investor. They’ve sat back for the last two years and watched stocks climb higher against all expectations while they have completely missed out on the action. One of the first things I learned in writing this newsletter over 12 years ago is that people hate missing out on a bull market. Many of them don’t even mind so much losing money in a bear market as they do missing out on the potentially huge profits when the stock market soars. As any veteran newsletter writer will testify, your audience is less likely to chastise you for making a blown call on either a long or short trade than they are to berate you for completely missing a major bull move. Needless to say, a lot of investment advisors have missed out on this recovery bull market and there’s an extremely large crowd of angry investors out there who are anxious to start getting a decent return on their money after years of low-to-negative returns.
Even if it takes Abby Joseph Cohen and friends to convince shell-shocked investors to come back to the stock market, it’s clear Wall Street will pull out all the stops to get the retail investor back into the market in 2011. This can’t come too soon for Wall Street, either, since 2011 is the last year that two key yearly cycles – the 4-year and the 6-year cycles – will be in the ascending phase. After October 2011, the last of the significant long-term cycles will have peaked and the final “hard down” phase of the 60-year cycle of deflation will be in full swing. That gives Wall Street a relatively brief intermediate-term window between now and next fall to unload their stocks on an returns-hungry public.
Assuming this is their game, the market will obviously have to be juiced even more to present the appearance of strength in the months ahead in order to successfully lure the public back into the equity market. That’s why the USA Today piece can be viewed as the first shot across the bow of Wall Street’s big propaganda push.
Gold ETF
The SPDR Gold Trust ETF (GLD, 137.12), our proxy for the gold price, still hasn’t confirmed an immediate-term buy signal after the ETF slipped under its immediate-term trend line Dec. 15. A close above the 137.71 level (the Dec. 29 closing level) will technically confirm a new immediate-term uptrend in the GLD.
It will be equally important to monitor the action of the U.S. dollar index in the days ahead. A good proxy for the dollar is the U.S. Bullish Dollar Fund ETF (UUP), which approximates the movements of the dollar index. UUP technically signaled the start of a new short-term uptrend in relation to its 30-day moving average on Nov. 11. A violation of the 22.87 level (the Dec. 13 close) would break the immediate-term uptrend for dollar ETF and would also likely remove overhead pressure from the gold price.
