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Bear Bottom Yet to Be Seen - Barron's

by: SA Editor Eli Hoffmann July 27, 2008 | about stocks: DIA / DMLP / PBT / SBR / SJT / SPY / USO    
Eli Hoffmann

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Eli Hoffmann

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There's every reason to believe we haven't yet reached bottom, Barron's Vito Racanelli posits:

Bear markets eventually get to all equity sectors, notes Mike O'Rourke, chief market strategist at broker BTIG. After housing, retail, financials -- and energy last week -- have been hit, technology might be next for a further mauling, given the poor trading action and recent disappointing news out of Apple (ticker: AAPL), Google (GOOG) and Microsoft (MSFT), he says.

The good news is the process is unfolding. The bad news is that there are plenty of stock groups not nearly as beaten-up as the ones mentioned above, and even a few that are up since the market hit a high last fall. Eventually, the bear will get to most, if not all, and investors will collectively cry "uncle!"

If you ask me about capitulation, I haven't see it yet. But it's coming.

Wachovia analyst Stuart Freeman notes that volume, both on the way down and on the way back up, was good, but not 'crushing.' "It was a bottom, but not The Bottom," he says.

Average bear markets shed 30% top to bottom (the Dow has given up just 22% thus far), and last longer than ours - which began in October.

Meanwhile, oil bulls - he notes- seem to have latched on to the belief global demand was completely inelastic. Recent data indicates otherwise. Down 15% from its highs, Federated Investors' chief investment officer Steve Auth sees the price of oil dropping to 80% in the medium term, as U.S. demand slows, and foreign demand follows suit. "Americans do respond to oil price signals. It takes a lot, but we got a lot," he says.

But for those hoping an oil bear will automatically lead to an equity bull, Racanelli says the data shows otherwise. In 26 oil bear markets since 1986 (drop of at least 20%), typical S&P gains are just 6% - much of which we've already received.

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Mark Barath suggests oil bulls capitulate, fast:

Currently the International Monetary Fund is predicting 3.73% global growth in 2008. This is 50 bps lower than in their forecast in January, and 125 bps lower than the 4.94% growth witnessed in 2007. Given the slowing growth around the globe, we are going to likely see demand for energy related commodities slow, which gives greater recognition to a longer term commodity slump.

Bespoke notes that consensus oil price targets have jumped to $125-128 from $80-90 as recently as April.

Only time will tell if this bullishness was prescient, or too little too late.

While conceding oil prices may have gotten ahead of themselves, Mike Stathis sees higher average prices long-term. He suggests using oil trusts (SBR, PBT, SJT, DMLP) as an inflation hedge.

Oil trusts offer an excellent solution to counter the effects of high inflation. And during this period of economic uncertainty, perhaps one of the few things we can be certain of is that oil will remain high for many years.

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This article has 10 comments:

  •  
    Jul 27 01:30 PM
    Of course we havent reached the bear bottom. The reason is we are not in a bear market. Each time we reach 20% the market goes back up (this has happened 3 times). We are in a credit crisis. We may or we may not have a bear.
    Reply
  •  
    Jul 27 01:37 PM
    CLH, I want some of the sunshine you're blowing. A bear market (which is somewhat arbitrary but no matter) is confirmed when we are down 20% from the last top, and ends when that last top is once again exceeded. It does not end on any rally that pokes its head back up above 20%. The equivalent to that would be saying that any decline signifies that start of a bear market because it might lead to a 20% decline; just because a bear market rally leaves us down "only" 15% or whatever and "might" lead back to the last top does not mean the bear is done.

    But I encourage you to trade as if it does. In that way we can increase the flow of money from you to me, which after all is the whole point of trading.
    Reply
  •  
    Jul 27 01:53 PM
    So is this as prescient as their "Feels good, The water's looking calmer for stocks" headline from 4/28 (including "The dollar's dark days are over" on the same front page)?
    Reply
  •  
    Jul 27 03:42 PM
    I don't see any stability returning to the market until the elections are over... And if the capital gains tax rate increases it could be quite a bit longer.
    Reply
  •  
    Jul 27 06:18 PM
    Holly COW. Barron's is going back to it's core principles. This is the first SA Barron's article that I can remember (last couple of months) that doesn't put a positive spin on the MARKET.
    Airlines, Housing, Financials and Real Estate are well into bear territory. With few exceptions there are no places to hide. This is a traders market not an investors market yet. Real bargains will emerge. We'll all know what there are (were) in about 2-5 years.
    Reply
  •  
    Jul 27 07:39 PM
    I would have to agree.
    Reply
  •  
    Jul 27 11:40 PM
    If this market doesn't doesn't decline at least 20% more, I see a stagnate market developing for at least the next 5 years. Oil $ is too much of a burden. There's no reason to be holding long positions in this market until at least that 20% additional correction comes.

    I expect a major decline coming within the next 8 weeks to a new lower trading range. Bear market charts make a major move lower to a new trading range about every 6-7 months. The volume will inevitably dry up late summer.
    Reply
  •  
    Jul 28 07:40 AM
    Oil only goes up on news from Iran, Nigeria, Russia, or some other hell hole, causing a "potential" problem (and the rise usaully happens overnight it seems.) The supply demand excuse has run the course, so the bulls now need blips of news. I'm short on oil for now. We keep seeing lowers lows.
    Reply
  •  
    Jul 28 09:55 AM
    Call it what you want, bear market of not, but my oil portfolio of BPT, HGY, LGCY, PBT, PWE and PVX is up 100% with no DRIP, from three years ago and has paid a 12% dividend return over the same period.

    This has meant my overall portfolio is still 10% annually into the black with only 30% of my money in oil.
    Reply
  •  
    Jul 28 10:15 PM
    We should all listen to zenalgorithm.
    Reply
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