I notice that yesterday and, so far as I can tell, today as well, none of the usual suspects is out on the hustings suggesting you buy stocks on the dip. Last time we were at similar lows, Eureka Report, Motley Fool, Intelligent Investor and a herd of others bellowed, bawled and mooed a bullish chorus.
No doubt they are licking their wounds.
But this is an important signal for the contrarian trader. The silence of the bulls shows that bearish sentiment is deepening. You’d have to be living under a rock to have missed the proliferation of ‘imminent collapse’ commentaries taking over the media too. All of the best macroeconomic commentators that I follow – Gavyn Davies, Paul Krugman, Wolfgang Munchau – can barely disguise their despair at Europe’s inability to fix itself.
I note as well, today, that the Pascometer has abandoned his tirade against the gold bubble, even as he should be crowing over its obvious bust.
In fact, at Fairfax, the skepticism is rampant, with another story about how today’s rally should not be trusted:
But analysts said there was still plenty of scope for disappointment if policymakers did not resolve liquidity and solvency issues in Europe.
“It’s a knee-jerk reaction to the world failing to come to an end last night,” said E.L. & C. Baillieu Stockbroking director Richard Morrow. “It is a reversal and I don’t see it lasting. The market has been as gloomy as I can remember since the last days of 2008.”
I too remain completely pessimistic about the prospects for European healing – as much so about today’s glittering new rumour of a leveraged TARP as every initiative before it. I mean, how will they push such a plan through the political gauntlet when they can’t get a simple Greek bailout through? I have no faith left in European can-kicking and overly complex leveraging solutions that ignore the underlying truth that member states are not competitive under the euro and will need permanent fiscal transfers to be sustainable.
But that assessment also holds the key as to why we might be able to launch into a pretty decent bear market rally here. Any fabulous new European bailout facility will take months to die, just as the Greek bailout has taken months of wrangling by the Troika, the domestic parliament, the various small states and their demands etc. In the mean time, markets capacity for self-delusion could take over for weeks before we resume the seemingly inexorable plunge towards a Western recession.
On that basis I asked The Prince to throw up some charts on which markets are oversold. The results were surpising, with the German DAX still relatively undersold:
As is the ASX:
With the S&P500, looking a little further stretched to the downside:
Quite overdone are the precious metals and the always volatile Hang Seng:
I would like to see more technical extremity to confidently call a decent bear market rally but sentiment is set up for it. Remember, playing anything in this market is trading only, using short stops and hedges.
For the remainder of the week, US data triggers include Durable Goods tonight, Kansas Fed tomorrow and the PMI Friday. In Europe, there are a couple of parliamentary votes that should pass ok, Greece tonight on the property tax and Germany on Thursday to ratify the EFSF. The big one is Monday’s US ISM.
