Dow's Romp Stokes Fear End Is Nigh For Bulls

Discussion in 'Wall St. News' started by Comanche, May 8, 2007.

  1. May 8, 2007 10:40 a.m. EDT


    Dow's Romp Stokes Fear End Is Nigh For Bulls


    NEW YORK -- Since bull markets are known to end with a flourish, the recent streak of consecutive gains and all-time highs set by major stock indexes has given some skeptics reason to call this the prelude to a big reversal.

    But can anyone really tell us when the end is nigh? Notwithstanding some convincing arguments that valuations are fairly rich at the moment, predicting a market top is much tougher than it looks.

    The Dow Jones Industrial Average, now up 55% from its October 2002 trough, saw its 20th record close of the year Monday and tied an 80-year record of 27 days without more than three down sessions. The last time there were five consecutive up days in a row was in April 1999, but the record of 12 goes back to 1987.

    For those inclined to see the glass as half empty, the streak seems ominous. Michael J. Panzner, author of "Financial Armageddon," wrote last week that "the record-setting string...coming as it has after a multi-year run, is characteristic of the kinds of climactic blow-offs that investors should fear rather than cheer." Bear fund manager David Tice called last week for a 50% decline in the Dow and said stocks are now forming a top.

    It isn't just the Energizer Bunny nature of the major indexes that has spurred talk of a denouement, though. Frenetic deal activity, record financial-system leverage and unprecedented public fascination with successful money managers are other indicators of excessive froth. There are also bad omens from popular culture such as the announcement of a remake of the movie "Wall Street" in the works, with Michael Douglas set to reprise his role as Gordon Gekko, now out of prison and running a hedge fund. The original film hit theaters two months after the 1987 crash, the biggest one-day percentage drop ever for stocks.

    No Bell At Top of the Market

    Unfortunately for those trying to read the tea leaves, the adage that "no one rings a bell at the top of the market" holds true and long winning streaks don't mean much historically. Analysts at Bespoke Investment Group point out that there have been 12 months since 1920 when at least 80% of trading sessions were positive for the Dow, including last month when 85% were up days. In eight of the past 11 instances, the market rose again the next month and the average performance was a 1.81% increase, or a healthy 21.7% annualized. The performance over the next three months was a so-so 6.36% annualized.

    Then there is the fact that the market isn't in a true buyer's panic, making fairly ordinary gains during the recent streak and having risen a modest 6.8% year-to-date. The Dow has gone 514 days without a 2% or greater rise, the longest such period since 1966 and the seventh longest period since 1900.

    Analysts at Bespoke wrote that the market is entirely too apprehensive about a correction for a big one to occur now, not the sort of blind buying euphoria one associates with the end of a bull market. They note that "while a pull-back after the rally we have had wouldn't be a surprise to most, this could be the very reason against one occurring -- everyone is expecting it." For example, even perma-bull Bob Doll of investment manager BlackRock said in a note released Monday that he has "been calling for an equity market correction or consolidation at any point in time."

    The streak of up days will end soon, perhaps as early as Tuesday, but the odds of a down day are close to 50% on any given session and have almost nothing to do with what the market did the day or week before. The odds of a 10% decline from the peak that would officially end the bull run are much lower but almost as random. Bull markets have to end, of course, but they don't die of old age. Jim Stack of Investech Research calculated that the average bull market lasts 3.4 years, making the current one long in the tooth but well short of a record.

    Bubbles Can Persist

    Taking the view that stocks are overvalued is a far cry from predicting the imminent end of a bull market. Noted money manager Jeremy Grantham of money manager GMO considers the current investment climate to be a "global bubble," but he shies away from trying to call a top. He noted that most bubbles have a short "exponential phase" and that this doesn't appear to have happened yet. He wrote that bear markets start when conditions are perceived as being slightly less perfect than the day before.

    "If bear markets start in nearly perfect conditions, far above average but just a little bit worse than the day before, what chance do historians have of finding the trigger?" he asked in a recent note. "Given all the uncertainties and the fact that conditions do not weaken linearly but in uneven and unpredictable steps, is it any surprise that we always miss market tops?"

    Making an outright bet on a market decline is a dangerous exercise, even when you are right about valuations. Selling tech stocks short when Nasdaq hit 3000 or 4000 may have been a good fundamental call but it would have devastated a portfolio well before it could benefit from the carnage. The great economist John Maynard Keynes warned that "the market can stay irrational longer than you can stay solvent."

    Fund manager John Hussman is more explicit than Grantham in a note sent to clients Monday, calling the recent run a "speculative blowoff," though he has done no more than fully hedge his funds' portfolios. He considers outright bearish bets to be ill-advised.

    "I am emphatically not forecasting nor relying on a market decline, but it is reasonable to allow for above-average market risk," he wrote. "Despite the fact that this bull market is already far beyond the normal duration of a bull market, we are not relying on the market to enter a bear market immediately. We can allow for the possibility that the bull has months or even years to go."

    (Spencer Jakab, a columnist who provides insightful and unique takes on financial markets, previously wrote about energy.)

    ---By Spencer Jakab, Dow Jones Newswires, 201-938-2429;

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