Last night I found myself absent-mindedly singing a snippet of a song from Meredith Wilson’s song from The Music Man, “The Sadder But Wiser Girl For Me.” Only to my surprise, the words came out differently…..”A slower and stealthier rally for me.” (Of course, I am much, much too young to actually remember The Music Man, but it was my dad’s favorite show and he had the record.)
Why am I wary? Because as I stated a few days ago, every Nasdaq rally in the past six months that was sparked by a major catalyst sputtered and sank faster than a new Kathie Lee Gifford record.
Will yesterday’s rally, engendered by the major catalyst of a surprise Fed rate cut, prove to be sustainable, or will this just another one or two day sucker’s rally in a bear market?
For the answer, we turn to Luber’s Beige Book of Investor Psychology. Luber’s beige book, like the Fed’s famed beige book, is an anecdotal report — not of economic activity, but of investor sentiment.
An important indicator in Luber’s beige book is the ratio of bullish to bearish analysts on CNBC and CNNfn. For the first time in a long time, the bulls seem to be winning. Analyst after analyst, including the venerable Abbey Cohen, made their case for a new bull market. Many pointed out that the stock market was already in rally mode before the Fed made its surprise move yesterday, and that the market’s failure to react to bad news was strong evidence of a bottom having been reached a few weeks ago.
Good earnings reports from the likes of IBM, Newport, Apple (Apple for crying out loud???), Siebel Systems, AMD, Intel, and a number of other technology companies eclipsed the bad news of Winstar going belly up.
There have been other good signs, to be sure. To me, the most notable sign that this may indeed be a sustainable rally is that the market blithely ignored Cisco’s bombshell earlier this week, demonstrating that the bad news was expected and had been priced into the stock — as well as the rest of the market.
And late yesterday afternoon I polled my good friends at www.metamarkets.com, and found the mood to be more upbeat than it has been in a long time.
Media reports on financial web sites were similarly optimistic. Bullish analysts were quoted in dozens of stories, and bullish journalists added their own arguments for good measure.
Although I believe, as I stated in my column a few days ago, that investor psychology shifted last week, I remain wary for a few reasons:
The market is rising on anticipation of improved earnings later this year, and the market may be a little too anticipatory in that regard. Everyone agrees that we still have two or three quarters of lousy earnings ahead of us.
Every catalyst-driven massive rally in the past six months has been followed by a massive sell off. It seems that every time investors have had an opportunity to regain even a smidgeon of what they have lost, they see it as an opportunity to flee the market with at least some shred of dignity and self worth, if not net worth. And it could happen again.
Investors have been Pavlovian-trained over the past year to be manic-depressive. Tomorrow, Alan Greenspan may get a grimace on his face that may in fact have been caused by a gas pain, but the media would run dozens of stories interpreting the look on Greenspan’s face as one of worry about the economy, and investor psychology would turn on a time. Don’t laugh — you know it’s true.
So while I am more optimistic than I have been in a long time that we are in the early stages of a sustainable rally, that tune from The Music Man still keeps running around in my head. I love stealth rallies because, by definition, nobody notices. Give me a Nasdaq that goes up 5 points a day for 30 days, instead of 150 points in a day. Nobody sells into stealth rallies, because nobody notices them, including the Fed, who is less inclined to change their rate cutting policy in the face of a slow, stealth rally than in an explosive one.
My experience has been that it is the stealth rallies that most set the foundation for bull markets — not one day wonders.
So let me know what you think: in a few weeks, will we all be singing “76 Trombones Led the Big Parade”, or will it be “We’ve Got Trouble My Friend, Right Here in River City”?
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