Should we Worry?

Thursday morning’s Wall Street Journal market recap article called the recent rally a ‘Buying Panic’.  But the part of the article we found most notable was the sentiment it portrayed. The story commented that even bullish investors were becoming more cautious and bracing for a short-term pullback.  Among the concerns cited was that consumer stocks should be avoided as they rely too heavily on a strong economy and consumer spending.  

While many would agree that the falling housing market will eventually hurt consumer spending, two later articles in the Money & Investing section show that is hasn't happened yet.

The first headline reads, “Cablevision Systems, MasterCard Advance”, and leads off with…”MasterCard (MA) and Yum Brands (YUM) closed at record highs as their profits pleased.”  Both of these stocks rely on spending by the consumer. While one could make the argument that both MA and YUM derive a large percentage of their sales overseas, another headline on the same page reads, “Chipotle and Buffalo Wild Wings Gain”. Both these restaurant chains reported stronger than expected earnings after the close on Tuesday, and both have all of their sales coming from the US consumer.  On Wednesday, Chipotle rose 18%, BWLD rose 14%, MA rose 10%, and YUM rose 6%. Makes you wonder whether consumer spending is weak after all.

Finally, while a pull-back after the rally we have had wouldn’t be a surprise to most, this could be the very reason against one occurring -- everyone is expecting it.  In April, most investors expected a lackluster earnings season, and we ended up with much stronger than expected results.  Today, as the AAII poll told us, most investors (54%) think the market is due for a fall, and you can see below what happens when bearish sentiment gets this high.

Comments

[j arp]

Gee, wasn't AAII sentiment pretty bearish in March 2000? Try extending the chart back a bit. Everybody thinks they're a contrarian. Retail investors don't have to chase, Money Market Funds pay 5%, with 100% principal repayment, compared to 1.8% yield on stocks with a chance of 50% principal recovery.

[mojave]

March '00 saw some HUGE S&P moves around the 1500 level; 15-20 pt daily moves were common - w/ a blow-off(?) mid-month 70 pt upday. Bulls then hit 65.7%, Bears were 20%. The next week, we had the all-time intraday high of 1553, then bled-off 50 points fairly quickly. That brought Bulls down to 38.9%, while Bears hit the 50% you refer to. So, not quite the spread we see this week, while it also immediately followed a more volatile period and a down move.

So, in my opinion, the March '00 period was different, and the Bull/Bear #s in response to it were different.