The Almanac Investor 7/6/6

Almanac Investor Alert - 7/6/2006

*** So You Wanna be a Bull ***

Weekly Changes:

DOW 11225.30 34.50 0.31%
S&P500 1274.07 1.20 0.09%
NASDAQ 2155.09 -19.29 -0.89%


“Know the enemy and know yourself; in a hundred battles you will never be in peril. When you are ignorant of the enemy, but know yourself, your chances of winning or losing are equal. If ignorant both of your enemy and yourself, you are certain in every battle to be in peril.”
— Sun Tzu (Chinese military strategist, "The Art of War," circa 6th century B.C.)

Has this recent rally shaken your belief that we are in a bear market? It shouldn’t have. The move up can be attributed to the mid-year rally that has occurred like clockwork for two decades. Refer to page 68 of the 2006 Stock Trader’s Almanac for the details. Any positive action tends to be wrapped up by the second week of July. Since 1987 this short run that starts the last few days of June has pushed NASDAQ higher 3.2% on average.

Almanac Investors understand the bearish stance we are advocating. Seasonality, the 4-year cycle, economic factors, energy, debt, housing and geopolitical instability have soured our stance for the better part of 2006 and, in our opinion conditions are worsening. We have sold into any rally and protected ourselves to the downside. But what are the tactics of the bull [enemy] in the other camp?

The market will rally when it gets oversold. It will bounce off of support levels and surge on good numbers from the dismal scientists. This has resulted is a series of strong up days, but in the long run has produced lower highs and lower lows since cresting in early May. But what is the overarching impetuous in the bull’s mind that guides them to believe that the market is heading to new highs for a sustained period?

First of all, there are more bulls out there than bears. As a matter of fact, according to the latest Advisors Sentiment survey complied by the outstanding researchers at Investors Intelligence, at last count 38.7% of advisors are bullish and 34.4% are bearish with the balance calling for a correction, thus buying on dips. The analysis of the Advisors Sentiment number is subjective and warrants following, but the upshot is that two-thirds of Advisors are either Bullish or not Bearish. Thus begging the question why is anyone bullish?

Suspend your belief that we are in a bear market. Ignore the fact that we are in the worst six-months of the most dangerous section of the presidential election cycle. Discount the inverted yield curve, the fact that we haven’t had a serious recession in decades and the fed resembles a rudderless ship adrift. Accept that the housing market is going to have a “soft landing”. Forget about the missiles flying in Iraq, Israel, Afghanistan and North Korea. You are a bull now and here is why:

1) Corporate earnings have been good and no major company has had significant earnings warnings so far. As long as the corporate balance sheets remain strong the markets will push forward.

2) Iraq is not as bad as the media makes it out to be. Oil production is up and the US has accomplished a lot of good things that don’t get reported. The Bush doctrine may still prove successful and if it does, stability in the Middle East will follow.

3) The economy is strong and inflation is in check. Moreover, the Greenspan/Bernanke measured rate increases may slow the economy perfectly just as it did in 1994-5.

4) This economy has weathered unbelievable shocks and has come out of it relatively unfazed. The market has grown callus to hurricanes, war, terrorism, energy prices and scandal to name but a few. Geopolitics and crisis no longer impact the market as it has in the past.

5) The US consumer is inexhaustible. If $70+ barrel oil hasn’t changed spending habits nothing will. Americans are rich and will stay that way.

This is what a bear needs to understand. This is the market mentality that we are up against. And they may be right and we may be wrong. After all, bears are still the minority on the street.

It is our belief that even if the market doesn’t plunge to our forecasted levels of Dow 8500, S&P 950 and NASDAQ 1750, we are not going to make new highs. So we are content to collect interest on our cash and bond positions and bet against the market with puts while doing limited buying mostly in the energy complex. We are biding our time and sharpening our horns.

When we pull our stakes and set up in the Bull camp, we will surely be in the minority again. When we don our horns, there will be oodles of bears prowling Wall Street. For 40 years the power of contrary thinking has been the key tenet to the success of our strategies.

Please trade carefully.
Those who study market history are bound to profit from it.

Sincerely,
Jeffrey A. Hirsch, Editor & Publisher
J. Taylor Brown, Vice President & Director of Research