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Why I Am Still Bullish

 March 05, 2012 09:20 AM

As the stock market consolidates and the Dow flirts with the 13K level, there have been some calls for an intermediate term top. I remain bullish over the next few months for the following reasons:
  • The risk trade bull run remains intact
  • Positive funds flow are buoying the markets;
  • Panic levels are still elevated;
  • "Expert opinion, defined as the better market timers, are bullish;
  • The Bernanke Put and Draghi Put still lives; and
  • The China property bubble lives on for another day.

The risk-on trade is still "on"
If you were to view the stock market through the lens of the risk-on/risk-off trade, then the risk-on bull move remains intact. Consider this chart of the relative performance of SPY against IEF, which shows a short-term relative uptrend in the context of an intermediate term uptrend.

Positive funds flows
Josh Brown pointed to a Reuters article indicating that institutional equity funds flows are positive. He went to say that they are likely to continue:
In my experience, these types of raising and lowering equity exposure cycles take place at a glacial pace and they rarely turn or stop on a dime.
Scott Grannis wrote that individual investor equity funds flows are just starting to turn positive and there is a lot of room for them to go further into stocks:

...and out of bonds, whose flows are still positive:

Grannis' conclusion was:
Adding it all up, I would say that we are a long way from seeing over-priced equities. Let's wait to see many months or even a few years of inflows to equity funds before concluding that the guy on the street is too bullish.

Panic levels are still elevated
Also consider the readings of the Crash Confidence Index from the Yale School of Management. A low level indicates a high level of fear and a high level indicates a high level of complacency. While the ECB's LTRO program has largely taken the risks of a banking meltdown off the table, investors confidence remain low and fear levels are still elevated. I interpret these conditions as being contrarian bullish.

"Expert" opinion is bullish
Mark Hulbert reports that the best market timers are leaning bullish, while the worst market timers are leaning bearish.
As an example, I don't know where the Aden sisters are in Hulbert's ratings, but I have tremendous respect for them and they are bullish. I have followed them, off and on, since the late 1970's during the gold mania that took bullion up to its peak of $850 in 1980, which they correctly called. Unlike other gold bugs, they turned bearish on gold and turned bullish on equities in the intervening period. They correctly called the rebirth of the commodity bull about ten years ago.

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