Hindsight Is 620 (Points, That is) for Market Timers
The stock market loves nothing more than humbling people who try to tell it to do what it doesn’t want to do.
Just look at the professional stock market timers who exited the market with dire warnings just as it bottomed in July’s wicked but brief pullback.
Perhaps the loudest bear at the time--or at least the one who got the greatest publicity--was Elaine Garzarelli of Garzarelli Capital. Since the October 1987 stock market plunge, she has been known as The Woman Who Called the Crash, and she was, in fact, bearish and right at the time.
But history didn’t repeat after July 23, when Garzarelli told clients that the market was poised to drop sharply from its already-depressed level. She foresaw a decline of 15% to 25% in major stock indexes from their spring highs.
As it turned out, July 23 marked the closing low for the Dow Jones industrial average in the summer decline: It dropped 44.39 points to 5,346.55 that day, in part because of Garzarelli’s bearish comments.
The index has since soared 620.22 points to 5,966.77 as of Tuesday, a 12% gain.
If Garzarelli and her clients have a bad case of collective whiplash, they aren’t alone:
* Huntington Beach-based Fabian Investment Resources, which advises thousands of mutual fund investors on market timing, got its clients out of U.S. stock funds on July 16, which was the day the Dow index reached its intra-day summer low of about 5,175 (i.e., the lowest point during trading, although it was higher by the time trading ended).
Fabian’s clients were advised to buy again on Sept. 6, with the Dow back to 5,659.86.
* Charles Hooper, editor of the Mutual Fund Strategist newsletter in Burlington, Vt., told his clients to sell on July 15, then bought into the market again on Aug. 20, nearly 400 Dow points higher.
* Byron Wien, strategist for brokerage Morgan Stanley & Co. in New York, was a national celebrity in mid-July thanks to his months-old warning of an imminent 1,000-point decline in the Dow. It looked like the Dow was well on its way to fulfilling Wien’s prediction.
But Wien never got his 1,000 points, and even as the market rebounded in August he stayed bearish. Finally, last week he threw in the proverbial towel before the market hanged him with it.
*
Many bullish analysts, of course, can hardly hide their glee that July’s sellers had it so wrong. Richard Eakle, who writes the Eakle Report market newsletter out of Fair Haven, N.J., and who is a former colleague of Wien’s, was virtually pounding the table for stocks on July 17, arguing that the market was showing all of the signs of a classic “selling climax”: the end of a downturn, not the beginning of a deeper one.
Record trading volume on July 16, and the Dow’s wild swing that day--plunging 167 points early in the day, then rebounding to finish with a 9-point gain--suggested a “significant bottom” had been made, Eakle wrote on July 17.
“I knew my former colleagues [at Morgan] would be proven wrong,” Eakle now says proudly.
The bears, for the most part, are suitably humbled. Some are reworking their market “models,” trying to understand why stocks have again confounded indicators that have historically suggested we’re overdue for a prolonged sell-off, something much worse than the 7.5% slide in the Dow from its May high to its July 23 closing low.
But other timers insist they don’t try to outguess the market, just ensure against a calamity.
Timing services like Fabian’s get clients out of stocks automatically when the market has begun a meaningful decline, usually somewhere between a 5% and 10% drop. Likewise, these services get clients in again when the market moves up by a preset amount. The timing services say the function they perform is saving people from horrendous losses, even if they miss part of the market’s gains when it resumes climbing.
It’s a valid point, says Mark Hulbert, whose Hulbert Financial Digest in Alexandria, Va., tracks investment newsletter advice. It is true, he says, that only 20% of timing services have been able to do it so well that they beat simply buying and holding stocks in the long run. The question is how many investors would be able to temporarily lose nearly 50% of their stocks’ value--as in the bear market of 1973-74--and still hold on, Hulbert says.
“You know you’re going to be whipsawed” with timing services, he says. “But it’s the price you pay to miss really terrible declines.”
Some of summer’s bears are making no apologies. Garzarelli says the market remains vulnerable to a 15% to 25% decline because, measured against interest rates and corporate earnings, stocks are overvalued at current prices.
Meanwhile, a long-bearish advisor known almost as well as Garzarelli--Joseph Granville of the Granville Market Letter--now is a raging bull, boldly predicting a Dow of 7,000 next year.
Unfortunately, the market doesn’t like to be told where to go in either direction. Although by many measures bullishness remains below its historic peaks, particularly those of pre-crash 1987 (when surveys routinely showed 60%-plus of market pros bullish), history suggests that as more bears abandon that camp and join the bulls, the market becomes increasingly vulnerable to the very setback the converted bears have given up waiting on.
The old Wall Street line is that the market saves its harshest lessons for the moment when every last investor believes the good times will go on forever.
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Bulls vs. Bears
A weekly survey of 135 independent investmetn newsletter editors shows that many turned bearish just at the stock market bottom in July. In recent weeks, as the market has rebounded, the percentage of bulls has jumped again. Here are the weekly bullish and bearish percentages of newsletter editors. (Those neither bullish nor outright bearish expect a short- term market decline.)
Bulls: 49.6%
Bears: 36.5%
Source: Investors Intelligence
