Bear hunting
Comment of the Day

October 31 2013

Commentary by David Fuller

Bear hunting

My thanks to a subscriber for this interesting column by James Mackintosh for FT Alphaville (may require subscription registration, a PDF version is in the Subscriber's Area.) Here is the opening
Where are all the bears? Even some of the usual suspects have stopped growling, with David Rosenberg of Gluskin Sheff going so far as to dispute the idea that he's a permabear. There are a few still carrying the flame - Russell Napier, the stock market historian, thinks the S&P 500 will fall to 500 - but with the S&P now at 1,772 there are few willing to listen to the growls.

Just how few is itself a cause for worry. Consider this chart [Ed: you can see these in the actual article above and also in the PDF version], showing the results of the weekly Investors Intelligence numbers for the proportion of investment newsletter writers who are bearish.

It is just about the equal lowest in 20 years. And it isn't alone. This is the American Association of Individual Investors weekly survey. It's far more volatile, partly because of the small number of (not scientifically selected) responses, so I only went back 10 years to keep the chart readable. Again, though, the bears have all but disappeared

David Fuller's view This is what you see when a market is technically quite overbought. I have been discussing other evidence of this situation all week in Comment of the Day and the Audios.

I will not repeat all my earlier comments but the best way to catch up with these, if you wish to do so, is to see this week's earlier Comments and especially listen to some of the Audios. Meanwhile, here are some relevant daily charts of US Indices, including Thursday's closes: Russell 2000, Nasdaq 100, S&P 500 and DJIA.

It has been a big, ranging advance since the important mid-November 2012 low. At minimum, these indices are overstretched on a short-term basis and due for some mean reversion towards the 200-day moving averages. It looks like this corrective phase commenced on Wednesday, and a pullback on Wall Street will temporarily drag many other global stock market indices lower as well.

However, if this is too cautious because of the big monetary policy tailwind, and if we see a euphoric November and December, that would look climactic, leading to a considerably bigger correction.

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