The Pink Slip Indicator
Tug of War Continues
by Barry Arnold, editor
The Primary Trend
In
early 2000, we made the case that all of the abuse directed at
value investors for their recent plight in the face of the Tech
bubble was a textbook example of a contrarian indicator. Value
was being shunned on Wall Street at precisely the wrong time.
An excerpt from the April 3, 2000, issue of The Primary Trend
follows:
It began innocently
enough in early 1999, as a few of the value-oriented newsletter
writers we swap ideas with started throwing in the towel and
closing up shop. Charles Clough, the long-time strategist at
Merrill Lynch, questioned the market's valuation levels for too
long and found himself out of a job. Robert Sanborn, a highly
regarded value investor at Oakmark Funds, has recently been replaced,
and value man Gary Brinson has stepped down at UBS Asset Management.
And, of course, we all are well aware of the media flogging that
Warren Buffett has taken this year
"Well, this
bull market has notched another casualty on its belt Julian Robertson.
Gamed value investor and head of hedge fund Tiger Asset Management,
Mr. Robertson has decided to shut down his funds after assets
dropped from $22 billion to $6 billion in just two years but
two of the most painful years for contrarian value players. While
it cannot be substantiated by empirical evidence, we believe
these `value casualties' are similar to the `magazine cover indicator'.
This overwhelming negative sentiment toward value and the `old
economy' stocks may be the classic sign of a bottom for these
sectors."
As it turns out, value
investing did indeed experience a reversal of fortunes that month.
"Old economy" stocks embarked on a mini-bull run throughout
2000 and 2001, even in the face of the damaging bear market that
inflicted pain on the rest of the stock market.
Why do we bring this
to investors' attention again? Because market psychology does
play an important role in the future direction of stock prices
especially at turning points. And today, the Pink Slip Indicator
(borrowed from Business Week) is signaling higher stock
prices ahead.
Just before the bubble
popped in 2000, several Wall Street brokerage houses fired their
most bearish strategists and economists. As we mentioned, Chuck
Clough was shown the door at Merrill Lynch. His doom and gloomster
colleagues who suffered the same fate included J.P. Morgan's
chief strategist Douglas Cliggott, Salomon Brothers' market strategist
David Shulman and Oppenheimer's renowned chief strategist Michael
Metz. With the benefit of hindsight, all were fired for being
correctly bearish.
Today, it is quite
the opposite. Now, with the bear market raging, Wall Street is
giving its bulls the "pink slip". The first such casualty
was a year ago when Merrill Lynch's bullish strategist, Christine
Callies, was replaced by long-time bear, Richard Bernstein. Merrill
Lynch also booted bullish chief economist Bruce Steinberg in
November in favor of the bearish David Rosenberg. Other high
profile bulls who are unemployed include Credit Suisse First
Boston's chief investment strategist, Tom Galvin, and Lehman
Brothers' chief market strategist, Jeffrey Applegate.
Even those bulls who
have hung on to their jobs, such as Abby Joseph Cohen and Joe
Battipaglia, have evidently been under house arrest and prohibited
from speaking to the media. The
Pink Slip Indicator, while very subjective and not a precise
timing tool, does shed some light on the current mood on Wall
Street. And with the new breed of bearish strategists currently
calling the shots, it may very well be an opportune time to play
the contrarian card and turn bullish.
Conclusion
The
stock market has seemingly lulled the bulls to sleep with another
one of its bear market rallies (Oct/Nov) followed by a pullback
(Dec/Jan). Robust earnings reports have failed to materialize
to spark stock prices, and the potential Iraqi War has acted
as a shroud.
Bears continue to grab
headlines with gloomy prognostications of a secular bear market.
While secular, or multiyear, bear markets are never fun, they
are not necessarily disastrous either. According to the work
of Dan Sullivan of The Chartist, in the last secular bear
market (1966 1982); the stock market actually had gains in 59%
of those years. Many cyclical bull markets emerged within the
context of the bear, with extraordinary gains in 1975 and 1976
immediately following the worst of the damage.
We are still cautious
due to the sentiment figures. The Investors Intelligence survey
continues to show bulls (47.2%) outnumbering bears (29.2%) by
a wide margin a phenomenon we would like to see reverse itself
in order to confirm a classic bottom. However, the Pink Slip
Indicator is bullish (from a contrarian point of view), and Walt
Deemer notes that total Rydex bearish fund assets have topped
$2.1 billion more than the $1.6 billion seen at the October low.
He refers to this as "active" bearishness, as opposed
to opinions and surveys.
We remain cautiously
optimistic and believe this tug-o-war will resolve itself to
the upside. Focus on value and position yourselves for the long-term
potential not the short-term "noise".
Editor's Note: Barry
Arnold is editor of The Primary Trend, 700 North Water
Street, Milwaukee, WI 53202. 1 year, 12 issues $80. Published
by Arnold Investment Council, which provides investment counseling/portfolio
management services to clients and to The Primary Trend family
of no-load mutual funds. Visit the web site at www.primarytrendfunds.com.
