July 24, 2007
Nasty and Getting Nastier
Here’s an excerpt from a column written by Eric Savitz in the October 14, 2002 issue of Barron’s. Anyone who is interested in studying market sentiment should go back and read Barron’s (or any mainstream financial publication) at major turning points. (This is part of my Remembering the Bottom of the Bear Market series of posts.)
Have you opened your third-quarter statements yet? Well, I’ve opened mine, and as Warren Zevon said, it ain’t that pretty at all. Makes me want to hurl myself against the wall. Makes me wonder why I didn’t sell three years ago. More importantly, it makes me wonder if I ought to sell now.
It’s the possibility that people like me might answer in the affirmative that has Jim Bianco worried. Bianco, proprietor of Chicago-based Bianco Research, observes that investors in equity mutual funds, measured since the bottom of the last bear market in 1990, have now had their collective profits completely eroded away. In other words, if you consider all the money that’s been invested in stock funds over the last 12 years, the combined return now amounts to a big fat goose egg. The same return available from a nice, comfy mattress.
The result, Bianco says, is that individual investors now face their “most important decision since the bear market began” in March 2000. “Do they sell and ‘cut their losses’,” he asks, “or continue to hold and ‘believe’ in the market?”
Bianco points out that for the last two months, equity funds have had outflows on a rolling 12-month basis for the first time since 1989. “The mutual-fund flow data suggests that investors are only now acting as if the profits from the 1990s bull market have been wiped out,” he wrote in a report last week.
If stock prices don’t bottom soon, Bianco warns, the risks will only increase. “If stocks continue to decline, it isn’t just ‘more of the same,’ as the public will have to decide if they believe in the stock market enough to take these losses. As history has shown, the public sells when their break-even point is reached.”
That, of course, would be unfortunate for the beleaguered equity markets. “I really think this is nasty and getting nastier as we speak,” Bianco said in an interview. “The financial markets are worried that something big is brewing out there,” citing in particular fears of a liquidity crisis involving a large bank with significant derivatives exposure, like J.P. Morgan Chase or Commerzbank.
The market’s best hope, he says, is for stocks to make a definitive bottom in October. “The situation is getting extreme — and part of that is the public is now out of profits. And historically, this is when they hit the sell button.”
July 24th, 2007 at 1:15 pm
On a related note, have you noticed that since the VIX bottomed in April it has continued to rise with the market? The market keeps going higher and so does volatility. I have also noted a few other indicators that are strongly pointing towards a market rally but the chart is already in rally mode…so it’s kind of throwing me for a loop.
July 24th, 2007 at 1:20 pm
How about one from a top to compare with today?
July 24th, 2007 at 5:44 pm
Brandon, this is the same pattern we saw in the market rally in the late 90’s. Something tells me we’re in for a good correction some time and then the market will rally like crazy.
Of course, it could just be my hope that it pulls back :)
July 24th, 2007 at 7:44 pm
I remember a July 02 Barron’s cover - it was directly after the July lows. It showed a cartoon bull, underwater, with concrete formed around its feet. Well, that was a fantastic indicator.
Finding a top based on barron’s will be a bit tougher simply because they aren’t prone to the same sense of giddyness as they are despair. However, once they start openly acknowledging the “strentght” of this bull, without the normal caveats, should start to put us close to a top.
July 24th, 2007 at 7:57 pm
as a matter of fact - today is the 5 yr anniversary of those july lows
July 24th, 2007 at 9:15 pm
Why do I recall March 03 as the low (not July 02)? Wasn’t there a pre-war dip below the 02 bottom? (Intentionally not checking this now, as a little emotional memory experiment.)
July 24th, 2007 at 9:22 pm
chad, who is ‘they’ in your second para.? Barrons, the investing public, both? I’m ruminating on your statement that despair outplays giddyness. I’ve generally characterized them as the two sides of one coin. And don’t forget the pride that adorns the reeded edge of that same coin.
July 25th, 2007 at 4:42 am
I say July was the bottom because it was extremely climatic. During that month, and june, it was nothing for the dow to fall 200 pts in a day - on an intraday basis, and did so quite regularly - i remember trading curbs being implemented on an almost daily basis. True, september actually had a lower low - i’m speaking intraday lows - but it never closed beneath those july (intraday) lows. And to me it was a range bound market, so even though september had a lower low, a breakout never materialized. And, there wasn’t the same level of panic that was prevalent in the market as there was in that july summer. To me - thats when the bear shot his proverbial “wad”, and couldn’t regain the strength to eclipse those wonderful trading days.
During the buildup to Iraq, the market did sell off, but it never eclipsed those lows of July and September. March did have a climatic, crystal clear start to the bull market, one in which I don’t think we’ll see for a very, very long time. Everyone uses the march lows for technical purposes, which i do to, thats when the bull was born, but the bear, was dead long before.
I wasn’t trading individual stocks back in 02, many blew through the july lows they hit. I was exclusively trading dow minis - so thats why my perspective is July for the end of the bear. I made money shorting the dow after july, but it was tough, and i got squeezed many, many times trying to short - I was still very much a bear - clinging to the fabled 61.8% retracement of the S&P, which never came. And when the war finally broke out, I knew the bear was dead, although I didn’t quite believe it at the time, from witnessing, first hand the carnage, that had been wrought.
I liken the end of the bear to the end of the bull of 00. Everyone remembers march as nasdaq 5000, but the naz made a couple more attempts at that peak, only to fail. The “start” of the bear, for me, was the motorola miss in september - that began the cascade. The lesson i learned from both is that big fantastic trends don’t generally reverse in one day, yes, I believe you need a massive reversal day to kill it, but belief never, cumulatively ends all at once in a single day. It takes, at least a few months for sentiment to sour enough to make that key massive reversal day to stick out in everyone’s mind, and give strength to a new trend.
The “they” i am referring to is Barrons.
July 26th, 2007 at 10:36 pm
chad: Thanks for the long comment, I just got around to reading it. I too mark the end of the bear happening in July 2002 though sentiment was also awful in early October of that year.
(Many people recall my old post from July 11, Buy Stocks Now)
The bull was well underway by March 2003, though there were still things (Boeing comes to mind) that were depressed as late as March ‘03.
As far as the end of the bubble goes, I know what you’re saying. March 2000 was certainly key and I mark the MSTR accounting scandal as the “tipping point” that killed the bull, but I’m ashamed to admit that I bought more tech stocks in October 2000 (I remember BEAS with particular chagrin) because I thought it “looked good and strong” in a weak market. So yes, trends don’t turn on a dime and it helps to get some distance from the market to view things clearly (I was way too wrapped up in the day to day action back in those years).
Anyway, thanks for the comment.
July 27th, 2007 at 12:45 am
Does today count as a beginning of the end type of a deal?
July 27th, 2007 at 1:15 am
and the classic thing from ‘02 was when maria bartiromo asked in the afternoon if maybe we should start looking to short stocks…
which marked if not the EXACT bottom, very very close to it.