Monday, July 2, 2012

Amidst the Gloom, Stocks Continue To Rise

Friday's massive rally on the back of the latest attempt to save the euro still left the S&P at a loss for the quarter.

On a price-only basis, the S&P 500 declined by 3.9% in the second quarter, but it is still up 7.7% for the year.  Including dividends, investors in the broader market average are up +9.5% for the year.

Here's how the Boston Globe described the year in the markets so far:

For all the scary headlines — a bailout of Spanish banks, JPMorgan’s huge trading loss, the sputtering job market, Facebook’s failed initial public offering — it’s a wonder stocks aren’t down more this year.

Actually, stocks aren’t down. That was a trick sentence. At the halfway mark for 2012, stocks are up more than 8 percent.

“People think we’re down because memories are short,’’ says Rex Macey, chief investment officer at Wilmington Trust Investment Advisors. “It feels like the market’s been worse than it actually has.’’ 

If you're a contrarian, you should bet on a continued rise in stocks despite the continued sense of unease.

Here's one indicator, courtesy of Savita Subramanian, Merrill Lynch's chief investment strategist (my emphasis added):

Wall Street equity sentiment falls further

After triggering a Buy signal in May, our measure of Wall Street bullishness on stocks declined again, marking the ninth time in eleven months that the indicator has fallen. 

The 0.8ppt decline pushed the indicator down to 49.3, the first time below 50 in
nearly 15 years, suggesting that sell side strategists are now more bearish on
equities than they were at any point during the collapse of the Tech Bubble or the recent Financial Crisis.
Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism and the fact that strategists are
recommending that investors significantly underweight equities vs. a traditional long term average benchmark weighting of 60-65%.

Bonds, meanwhile, continue to be wildly popular with investors, despite yields at multi-generation lows.