Despite
a string of new all-time highs, many investors are sitting out what has been
one of the most impressive stock market rallies in years. A “buyer’s strike” has materialized this year
in which value-oriented investors have deemed the market to be too
expensive. Their collective response:
taking no action while the bull market passes them by.
Highlighting
the shrinking participation rate among value investors, an article appearing in
last week’s issue of Businessweek
explained the mentality behind the buyer’s strike. Value investors look for stocks considered to
be cheap relative to a company’s earnings prospects, cash flow or assets. The last time value managers sat on their
hands during an impressive market rally was in 2007 prior to the credit
crash. A contrarian might quickly draw
parallels between now and then, but really there is little comparison to be
made. In 2007 the rate of public
participation in stocks was quite high versus a relatively low direct
participation rate today.
Value
managers look for bear market or young bull markets to put their money to work
but tend to eschew committing large sums of capital in maturing bull
markets. The problem with this strategy
is that a maturing bull market can remain mature for a long time before
eventually giving way to the next bear market.
The likelihood is high that these sidelined investors will be tempted
back into a rising market before this bull has ended.
Piper
Jaffrey’s Craig Johnson believes the S&P 500 will reach his conservative
upside target of 1,850 before the end of the year. He points out that equities are currently the
only game in town now that bonds look dicey and gold is going nowhere. He told Yahoo’s Breakout that the bullish
case for stocks is based on a slow-growth economy and lack of investment
alternatives. He also pointed out that
almost no one believes in the sustainability of this bull market. That’s reason enough, from a contrarian’s
perspective, to expect further gains before the bull has reached full
maturity.
Johnson’s
very reasonable upside target of S&P 1,850 should be reached by the end of
the year. This is very much a trending
market and it’s clear that the major indices, including the SPX, are respecting
the trend channels. Investor sentiment
remains optimistic, yet it’s not at frenzied levels normally associated with an
imminent reversal.
As
for this being a trend-traders market, many investors who pride themselves on
being the “smart money” tend to sneer at trend trading. What they don’t realize is that trading
methodologies are cyclic in their effectiveness. Trend trading wasn’t a particularly effective
tool during the early stages of the bull market in 2009-2011. Yet it has worked wonderfully for the better
part of the last two years. Moreover, it
isn’t being overly utilized by individual traders which is a good sign for its
continuity (at least until the crowd embraces it).
It’s
also clear that the S&P 500 Index is respecting the parameters of a
long-term parallel trend channel. The
upper trend channel boundary happens to coincide closely with the 1,850 level
mentioned by Piper Jaffrey’s Johnson. A
failure to at least test the upper channel boundary before the next major
correction gets underway would be surprising given the levels of skepticism out
there. It remains, for all intents and
purposes, the bull market no one believes in.
