Wall Street analysts' votes are in. The S&P 500 will
end the year around 1,952. Put your money in an index fund,
sit back, and take in 6% this year. Easy, right?
If only investing were so simple. History shows us time
and time again that there are good times to invest and bad times
too. How can we distinguish between the two?
No Bears Among 'Em
According to a MarketWatch survey of those ten Wall Street
banks, on the high side J.P. Morgan (
) sees the S&P at 2,075, a 12% potential gain by year
end. On the low end of the estimates, Deutsche Bank (
) sees 1,850, a flat return from the recent close.
Almost every analyst has a different end of the year target
price, but one thing they all have in common - in a sure
sign of groupthink - is the expectation of higher market
The chart below shows one of those Wall Street Bank's estimates
through time. Goldman Sachs (
) sees the S&P (NYSEARCA:SPY) at 1,900 by the end of the year
and up to 2,100 by 2015 on the back of expected earnings
But looking at the chart, one thing stands out. Like most
market participants, Goldman's price targets have lagged the
market's movements. They were bullish at the market's peak in
2007 and bearish at the market's bottom in 2009.
When the market is rising such as the mid-2000s and today, the
bank keeps raising its estimates. At the market's peak at
1,575 in 2007, Goldman expected a continued advance over
1,650. Then, when the markets fell 20% the bank finally
reflected reality in their estimates, lowering them in 2008 as the
market moved lower.
When the markets bottomed in March 2009, Goldman thought prices
were going to continue lower, which they of course didn't.
They played catch up with their estimates throughout all of 2009 as
the market rallied.
This is shown by the black line on the graph as their estimates
are more a reflection of the past and recency bias than they are of
the future, especially at key market turning points.
A Market that is Complacent is one that is
Analysts use a lot of different data and tools to come up with
estimates, expectations, etc. to balance risk and return
expectations. For instance, although the analysts quoted
above all expect the markets (NYSEARCA:XIV) to end higher by next
year, they also expect a "normal" 10% pullback at some point during
the year, primarily because statistically it is long overdue.
If this is true, though, why not wait until that 10% pullback
occurs before putting your money in the market? Wouldn't your
reward potential would be over 16% instead of the 6% implied by
their current estimates?
But when is the 10% pullback going to occur?
The chart below shows a tool I am using that other analysts
likely aren't or are choosing to ignore because it doesn't support
their conflicted interests of a rising market (NYSEARCA:SSO).
The chart below suggests conditions are ripe now for such a
In an article I wrote on 1/13 just before the market fell 6%
last month entitled "
Rough Road Ahead for an Overly Bullish Stock
", I pointed to the above chart along with a few other indicators
that were warning of extreme complacency in the market.
As can be seen, even though it is now one month later and the
market has already recovered the 6% pullback last month,
complacency still sits near all time highs as the number of
investors actually expecting a market decline (measured by those
who own put options compared to call options) still resides at six
The chart shows that when this ratio bottoms (historically
around 80% the number of puts to the number of calls) the market
(NYSEARCA:SDS) has its largest pullbacks. After all when
everyone is bullish, there are fewer bulls left to continue to push
the market higher as well as less people to sell to.
Eventually bulls dry up and price must decline to attract them
When this ratio spikes higher, it has identified the better
opportunities to go long. But right now this indicator
suggests investors are far from that opportunity.
Are you still sure buying stocks at these levels is the right
Profit Strategy Newsletter
and Technical Forecast specializes in technical and sentiment
analysis to help keep investors on the right side of the
market. Right now, complacency as shown by the put/call ratio
is very high. This coupled with a number of other indicators
we have discussed in our monthly Newsletter and twice weekly
Technical Forecast help us to manage risk and spot high profit
opportunities others have missed.
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