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What bear scarcity really means


FTSE's repeat sell-signal

A bit of weakness now is frankly just what the doctor ordered. My only complaint is that the US is looking so robust. The S&P gave a repeat buy-signal on Friday 6 December, while the Nasdaq 100 is actually rather overbought. Another pullback on Wall Street, say to the 21-day exponential moving averages, would set up an end-of-year rally - and make a great buying opportunity.


S&P's buy-signal

The fear of the day seems to be that the Federal Reserve is about to pare back its money-printing bonanza. I agree that will likely be bad for stocks once it happens. But I don’t really see it happening at the Fed’s 17-18 December meeting. In fact, I think that it might even wait until once Janet Yellen has taken up the reins in February. Continued easy money and positive seasonality tilt the odds in favour of fresh highs in the US.


Beguilingly bearish

I have done some deeper digging into the subject of the current lack of bearishness among pundits. To recap, the number of American investment newsletter writers expressing negative views on the stock market has shrivelled to below 15 per cent in each of the last two weeks’ Investors Intelligence surveys. The last time this happened was in early 1987, and it was also a feature of the lead-ups to bear markets in the 1960s and 1970s. Today’s reading is being widely touted as a reason to be wary, including by the report’s compilers.


Bear scarcity way before top


While the implications of the chart do indeed look bewitchingly negative to the naked eye, the statistical reality is rather more mundane. Put simply, it can take a very long time after the bears go missing for the S&P to peak out. In the early 1970s, for example, there was a gap of almost two years between the first occasion that the bears went below 15 per cent and the S&P topping. The shortest gap was around 8 months in 1976. Selling up merely because opinion is heavily skewed has generally been a good way to miss big rallies, not to sidestep painful losses.

What sort of returns might we expect in the very near future, meanwhile? In the past, after very low bearish readings such as today’s, the median return over 1, 3 and 6 months has been 1.2, 2.5 and 2.6 per cent respectively. The odds of negative returns have been in the region of one-third for each of those timeframes. And over one and three months, such losses as have occurred have never been that severe. The worst was 4.6 per cent.

The bottom line is that the current scarcity of bears is, in itself, not a reason to be worried. The fact that so many people seem to believe that it is, however, is probably a good thing as far as near-term gains are concerned. I shall be publishing a fuller report on this very shortly.