Unrelenting Negativity

Having been unplugged for the first four trading days of the week and having no connection to the financial markets other than the Internet and periodic updates on CTV Newsnet, my reading of sentiment is not in real-time.  However, I have been catching up on my backlog of readings which piled up over the past month, and what struck me was the intense negative sentiment of almost every commentator I read.

Now, the tens of readers who have followed this blog over the past few years might have the impression that I am a perma-bear, given my general negative tone since I began wasting time feeding my own ego writing Running of the Bulls.  I am a cynic and skeptic - how could you not be when you work in the financial services industry? - but I do not live in a perpetual state waiting for imminent doom. 

(This is unlike my otherwise friendly and engaging neighbor, who has 40,000 rounds of ammo and guns at every window, waiting for a recreation of Lord of the Flies when the next hurricane strikes, which will almost certainly never happen given that we live many miles from the ocean and a cat 5 storm surge would come nowhere near us.  As a Canadian living in America, I find this highly unnerving.)

I have been structurally bearish on the market for the past decade but have taken opportunities on the long side when presented.  I think one of those opportunities is now.  I have eliminated my remaining small short position in REITs through the sale of the ProShares UltraShort Real Estate ETF, ticker SRS, and have been buying the ProShares Ultra S&P500 ETF, ticker SSO.  I do believe we are in a bear market, and will be in one for a while, thus this is a trade and I have placed tight stops under my SSO long in case I am wrong.  The bearishness in the market is so overwhelming and seemingly so obvious that a move to the upside is what would be the greatest surprise to most investors, in my opinion.

It goes without saying that you should not do what I do.  Assume that I am wrong.  Instead, make your own decisions based on your own analysis, not the opinions of an anonymous blogger.

I believe that the market is in a trading range with a downward bias, and stocks will at least surpass the average bear market decline of 30% top to bottom, which means the S&P 500 has at least another 10% more to the downside.  Also note that the broad-market declines in the two worst bear markets over the past 40 years was a 43% decline in the S&P 500 in 2000-02, and a 48% loss in 1973-74.  If you use those two bear markets as frameworks, we are about half-way through the sell-off, though I think you can make a very strong argument that stocks will not fall as far.

Thus I think that we are at least half way through this cyclical bear market - which started either with the top in October or the first violent downdraft in March of last year - in terms of return.  In terms of time, I think the ultimate bottom will occur next year.

A potential bottom in 2009 may be the ultimate bottom of the structural bear market which either began in 2000 when looking at the broad market indices or the beginning of 1998 if you look at the average stock.

I may be wrong, of course.  We may not bottom until 2010 or 2011 or 2012, I don't know.  The point, however, is that we should start looking for a structural bottom in stocks as I believe we are closer to the end of the structural bear market than the beginning.

Comments

[psychodave]

As far as your perception of negative sentiment goes, this hoary post may still have relevance to today's market

http://globaleconomicanalysis.blogspot.com/2008/07/you-know-banking-system-is-unsound-when.html

Not a lot has changed, and cultural memory of credit crises associates them with lower asset values. Lots lower.

Apologies in advance if the link is busted, it worked in "Preview".

[kerry]

Yes, people are MUCH too negative right now and another bear rout is probably in the cards.

The thing is, EVERYONE thinks the bear will last longer and that the ultimate downturn will be 30% or so. I think that as (or maybe if) oil comes down and it appears the housing market has bottomed in some regions, we get a sustained rally and top out higher than one would think. I have spent a lot of time reviewing the housing numbers, and for most of the country the housing numbers will start to stabilize quite soon. (Cali and Miami...uggh.) If oil was the speculative bubble that Soros believes it was, the fall in oil should also fuel the bear rout. I don't know everything on the financials, but given how crowded that short position is and given how a lot of big money will be more than willing to recapitalize regional banks and given that I can see all sorts of arbitrage opps that big money can take advantage of to destroy the shorts, I don't see how the shorts there do not end up dying. (and I was one of them at one point.) AND as housing does stabilize, debt markets will thaw.

There is a 100% obvious arb opportunity sitting out there for someone to take over MBI and ABK. The right someone. Ackman discussed this 4 months ago.

Given that the credit crisis will ultimately mean that the world economic structure will have to evolve, I'd think we will eventually end up with weakness after that rally, but US multinationals should do relatively well.