Thursday, March 9, 2017

Will Trump Top Obama As Investor-In-Chief?

The new administration has ambitious economic plans that might keep the bull market going.


By Michael Brush
MarketWatch
March 9, 2017

Think what you will of former President Barack Obama, he was a great investor-in-chief.

On March 3, 2009, days before the start of the amazing bull market rally that turns eight this week, he told us that stocks had gotten so cheap they looked like a “good deal.”

Eight years on, the S&P 500 Index SPX, -0.23% is up 240%. It’s posted a compound annual growth rate that would make Warren Buffett smile: 13%.

Now that the market has risen so much, apparently on expectations of business-friendly reforms from President Donald Trump, I’d love to know what Obama thinks about whether to buy or sell, given his record.

Alas, we don’t know his market view. The truth is, whatever he thinks might be tainted by partisanship. There’s a lot of that going around now. As an investor, you should try to avoid this pitfall, especially if you are on the left. Buffett, who backed Hillary Clinton, recently quipped that for half of his adult life this country had a president he didn’t vote for, but that never kept him out of stocks.

But it feels like it’s time to sell. After all, Trump appears unpredictable, to put it mildly. And at least two signals are telling us to be cautious about this rally.

1. Insiders are bleak

We may no longer have Obama to help us with market guidance, but we can turn to other higher-ups: corporate insiders. The news is bleak for bulls. Insiders are selling this rally hard — so hard they’re driving insider sentiment into extremely bearish territory.

The selling has pummeled an eight-week sell-buy ratio tracked by Vickers Weekly Insider, which analyzes insider activity. It is up to 6.3 from around 3 at the start of November. Insiders have continually stepped up selling, relative to buying, in the post-election rally. “The current sentiment reading is solidly bearish,” says David Coleman, of Vickers Weekly Insider.

2. Investors may be too bullish


I like to watch investor sentiment for contrarian signals. After all, the best time to buy is when investors are frightened. And a good time to sell is when investors are exuberant. This means there are fewer people left to come in to buy your shares and drive them higher. Besides, in the market, the crowd is often wrong.

Here too, though, we see bad news for bulls. Various sentiment measures I track show lots of optimism.

The Investors Intelligence bull-bear ratio, a measure of stock-newsletter-writer sentiment, rose to 3.82 last week. Generally, anything above 4 is a big red flag. The National Association of Active Investment Managers survey shows an allocation to stocks of 102%, the second-highest level on record. Put buying, a signal of bearishness, is low relative to call buying, which signals optimism.

Still Too Early To Dump The Trump Bump


Even though insiders are negative and investors are extremely optimistic — often a bad combination for bulls — it’s still too early to sell the Trump bump in the market. Here’s why.

First, the insiders. Like many investment analysts, Coleman at Vickers Weekly Insider cautions investors against making decisions on the basis of insider sentiment alone. Insiders can be early. Markets can rally for a while even though they are negative.

Next, while sentiment seems very high, it’s not high across the board. There are several exceptions that suggest we aren’t at extremes, maintains Bruce Bittles, the chief investment strategist at Baird. “I don’t think there’s enough optimism to overwhelm the trend in the market, which is decidedly bullish. You need more optimism than this to stop a market that has broken out of a trading range.” That’s because, for him, the optimism is not “deep-seated.”

Retail investors, for example, are still relatively cautious, he points out. The number of bulls in the American Association of Individual Investors (AAII) survey recently stood at 37.9%, which is below average.

The yield on 10-year Treasury bonds is still around where it was in the fourth quarter of 2016, suggesting bond vigilantes are cautious on economic growth.

And the financial media remain cautious. Journalists are worth watching for a sentiment read, because they are often very good contrarian indicators. They’re not necessarily dumb. They’re just good at knowing what people want to read about. That makes them a good reflection of investor mood.

And, tellingly, the mood in the press remains skeptical of this rally. “Nobody wants to talk about the market going higher,” says Bittles. “Every reporter I talk with is trying to get me to say the market is going to go down because of the uncertainty. But the uncertainty is what drives a market higher.”

Here, Bittles is referring to the adage: The markets like to climb a wall of worry. That’s another way of saying you need cautious investors on the sidelines to come in and drive your stocks higher. The cautious media mood is telling us that’s still the case.

Market Internals

When sentiment is high, as it is now, it becomes even more important to watch for a deterioration in market “internals” to indicate that a pullback is at hand. “Market internals” refers to the extent to which stocks are broadly participating in the advances tallied by narrow indices like the Dow Jones Industrial Average DJIA, -0.33% or the S&P 500.

A deadly combination of extreme bullishness among investors and narrowing participation among stocks in market strength (weak internals) preceded and signaled the bout of market weakness that started in August 2015.

But we don’t see this combination now, because market internals are not deteriorating as indices advance. Stocks are still broadly participating in the current rally. That’s a bullish signal worth following.

Here are some details. In the current market strength, the percentage of stocks making new highs in the S&P 500 — around 30% — is higher than it’s been since the first half of 2013. Another measure of the strength of market internals, the share of stocks in the S&P 500 above their 200-day averages recently surged to almost 85%, the highest level since 2014.

“The path of least resistance for now still seems to be higher,” says Bittles. Any near-term correction, he predicts, will be shallow.

The Push From Here


Given that Trump sometimes acts like a bull in a china shop — he might do something that spooks investors or, at best, fail to get reform quickly — what’s going to give the bull market further strength, from here? Two things.

1. For the first time in this recovery, there’s a “broad, global, synchronized bounce in economic momentum,” says James Paulsen, a chief investment strategist and economist with Wells Capital Management. Global growth is supported by uniformly expansionary policies in most of the main economic regions of the globe, something that’s been lacking much of the time since the financial meltdown.

“No longer do we have U.S. economic stimulus in direct conflict with eurozone fiscal austerity, Japanese policy indifference or China’s earlier quest to moderate their recovery,” says Paulsen. “Today, policy officials nearly everywhere are pushing up in concert on the recovery, and it is working.” As evidence, he cites a global economic surprise index tracked by Citigroup. It is at a seven-year high.

All of this makes the stock market far less susceptible to “Trump antics,” or delays in the implementation of his plans, than most people think, he says. “This has not been a stock market rally based on some flimsy ‘Trump hope,’ ” says Paulsen.

2. Business leaders, the people whose hiring and capital-spending decisions drive the economy, are so enthralled with Trump’s pro-business mindset, it’s going to take more than a few delays in implementing his regulatory and tax reforms to cool them off, which is a fear of investors.

“Some of us have said that this is probably the most pro-business administration since the founding fathers,” Dow Chemical DOW, +0.21% CEO Andrew Liveris said after a February meeting with the executive branch. “There is no question that the language of business is occurring here at the White House.”

The National Federation of Independent Business’ (NFIB) Index of Small Business Optimism shot above 105 after the election from the mid-90 range, hitting levels not seen since 2004. “The recent growth in optimism looks similar to the surge in the Index in 1983, which was followed by years of economic prosperity,” says NFIB chief economist Bill Dunkelberg.

Business leaders are so bullish on Trump, it will take more than delays in the approval of promised reform to throw them off track, predicts Ed Yardeni, president and chief investment strategist of Yardeni Research. “Timing isn’t everything, as long as investors are convinced that Trump will deliver on his bullish goodies in the foreseeable future, meaning within the next two years,” says Yardeni.


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