By Chloe Lutts Jensen
Dick Davis Investment Digest
Dick Davis Dividend Digest
How are you feeling about the market this September? If you're
worried, you're in good company.
The percentage of bulls, as measured by the Investors
Intelligence sentiment survey, just fell to its lowest level of the
year, at 37.1%. In addition, the percentage of advisors putting
themselves in the "correction" camp, at 39.2%, now exceeds those in
the bullish camp for the first time since June 2012.
Investors Intelligence notes that the bears are still the
smallest group, at 23.7%, and have barely added to their members
this week. However, the survey did find "more expressions that the
bull market is close to ending its record run as far as time
Indeed, ever since the possibility of military intervention in
Syria became the leading news story here, advisors have taken on a
more pessimistic tone, regardless of their overall outlook.
One Dick Davis Digest contributor wrote yesterday:
"Stocks opened strongly but gave up the majority of their gains
when it appeared that President Obama will obtain Congress's
approval to bomb Syria. The S&P 500 Index ended the day ahead
"As expected, our models have downgraded from outright bullish
to neutral-bullish. Under such conditions, historically, stocks
have risen, but have experienced twice the risk as under outright
bullish conditions. As a result, we have reduced client equity
exposure by approximately 1/4."
That's a pretty cautious sounding bull.
Likewise, many advisors from the correction camp are now calling
for "further downside" here, even though the Dow has already
corrected over 5% from its August 2 high. Many of those in the
correction camp insist that a 10%-15% correction is necessary,
including Digest Contributor Richard Rhodes, who wrote
"The S&P 500 remains above the 160-week moving average
long-term support level at 1363; and the standard 200-day moving
average support level at 1562. But perhaps more importantly, the
distance above the 160-day 'failed' at the +23- to +25% zone that
is our 'bubble-like rally' threshold. Hence, a correction of some
proportion is forthcoming-perhaps -15% or more." But Rhodes is not
a bear, in fact, he made it a point to note: "We believe this is a
decline of intermediate-term proportion at this point; more
evidence is needed to declare this is a bear market decline of -20%
McClellan Market Report Editor Tom McClellan is also in
correction mode, in fact, he expects several months of cascading
corrections ahead. He wrote yesterday: "It is correction time for
stock prices, a period likely to last into November, or possibly
December before we get a real up move. Until then, we should see a
lot of bottoms that investors will think are the final one, only to
be disappointed. By late November, when everyone has given up hope,
it will finally be time for prices to start back upward again. Look
for stocks to make an accelerated down move into a bottom due
September 18, but that won't be the last of it." Other negative
voices are not hard to find among our Dick Davis Digest
Contributors. One wrote Tuesday: "We believe the Market is headed
LOWER-and would be cashing in on those large positions with lots of
profits or lots of money invested. We would be going to the
sidelines and waiting to see what happens regarding Syria."
PAD Systems Report Editor Dan Seiver is also bracing for
downside, writing on September 1: "It's an old Wall Street adage:
'Nobody rings a bell at the top.' But with the bull market over
four years old, valuations stretched, and crises on stage and
waiting in the wings, we think we heard something. August's
decline, while relatively mild, could presage further declines this
fall, especially since September has historically been the weakest
month of the year for stocks."
He's maintaining cash reserves of around 50%.
And then of course there's the 23% of advisors who are downright
bearish here. They include the Editors of The Elliott Wave
Financial Forecast, who argued in their latest newsletter that
August's correction actually marks "the start of a broad stock
market decline that will unfold over the coming years. The negative
social mood behind it will influence all realms of social
It's all quite depressing... if you take the comments at face
Of course, there is an alternative: the contrarian perspective.
Contrarians believe that the best time to buy is when everyone else
is at their most fearful. But is market sentiment low enough today
to conclude that we're at a "blood in the streets" moment? It's
never possible to say exactly-sentiment could always go lower-but
from most perspectives today, things do look pretty grim.
At least one of our Digest Contributors thinks we're at an
inflection point here. Here's what John M. Boyd wrote in Fidelity
Monitor & Insight on Tuesday: "It's no wonder that fear has
gripped the retail investor. Recently, the American Association of
Individual Investor's weekly survey of its members showed 49% to be
bearish versus a long-term average of 30.5%. While bearishness
since ticked down a bit, it had moved higher for six straight
weeks. And things are no better among the pros. The Sell Side
Consensus indicator developed by Bank of America Merrill Lynch
(which measures the recommended level of equities from nine major
brokerage firms) sits at just 52.3%, well below the average of
60.4%. Indeed, August was a dismal month with the S&P 500
falling 2.9%. "But the market is a perverse entity. As the old
saying goes, 'the market tends to move in the direction that causes
the most pain to the most people.' In this case, with most everyone
waiting for the next shoe to drop and the market to crack, that
would be for it to move higher.
"In fact, if we return to the AAII sentiment data, Bespoke
Investment Group points out that, historically, when bearish
sentiment has increased for five straight weeks the market has been
higher by an average of 9% over the next six months.
"Furthermore, Bank of America notes that when their Sell Side
indicator has been as low as it is now, total returns on the
S&P 500 over the next 12 months have been higher 95% of the
time, with a median return of 27%."
Of course, neither of those studies is specific enough to have
any bearing on what happens over the next month-the market could
continue to correct through September and still easily deliver on
the promise of 9% returns over the next six months and gains over
the next 12. So being a contrarian here doesn't necessarily mean
loading up your portfolio with a bunch of new names. It might just
mean being ready to recognize and take advantage of the uptrend
when it starts again. Or it might mean doing some cautious buying
of names that are holding up well, like some of the strong
market-leading growth stock that have ignored August's decline.
In fact, if your contrarian streak is giving you an itch to buy
here, there are plenty of good names available. The last few
months' divergence between growth stocks and conservative
investments has been large enough that plenty of growth stocks
still have great-looking charts here. Looking at the charts of
growth leaders like Yelp (
), you wouldn't even know there was a correction going on.
One stock from that category that I particularly like is
Cabot Oil & Gas (
. Rather than correcting in August, the stock hit new highs. And
Robert Rapier and Igor Greenwald, Digest Contributors who had
previously recommended the stock in their newsletter, The Energy
Strategist, decided to raise their buy limit on the stock.
They originally recommended the stock around $34
(split-adjusted) in March. Here's their update from the latest
"In the energy sector, you can have very rapid production growth
or capital spending within the limits of free cash flow. But very
seldom do you get both from the same company, much less one with a
track record of delivering on a variety of other operational and
"When you find a unicorn like that, you've got to ride it as far
as it will go. This is why Cabot Oil & Gas (
) remains not just a Growth Portfolio Best Buy but our favorite
idea in the entire energy universe.
"The quarterly results reported last week continued to exceed
those high expectations. The leading gas driller in Pennsylvania's
Marcellus shale formation reported adjusted second-quarter earnings
of 45 cents a share, 6 cents above the consensus estimate, along
with a 52% year-over-year increase in production and a
near-doubling of cash flow from operations.
"Those results don't even reflect the recent startup of a
compression station that appears to have given a 15% production
boost to the connected Cabot wells, encouraging the company to lift
its annual production growth forecast to a range of 44% to 54%, up
from 35% to 50% previously. Cabot also continued to see strong
flows from 'step-out' wells outside its main production area in
northeast Pennsylvania, and as a result is bringing in a sixth
drilling rig and possibly a seventh one next year, providing a
further boost to its already bright outlook for 2014 and
"Meanwhile, total unit costs were down 28% year-over-year, so
growth will continue to be financed by the swelling cash from
operations. While natural gas prices have been weak of late, Cabot
is well hedged in the near-term and is unlikely to sustain a
material hit so long as prices stay above $3 per thousand cubic
feet (Mcf). At the same time, the company retains the upside
exposure to a long-term move above $5 per Mcf, expected by many
analysts once exports of liquefied natural gas (
) begin in 2016.
"Cabot celebrated its recent good fortune by doubling the
quarterly dividend to 16 cents a share as part of the forthcoming
2:1 stock split.
"The company also reported strong oil drilling results in the
Eagle Ford shale in south Texas, and is shifting a rig there from
its Marmaton Oklahoma play. But this remains primarily a natural
gas story, one that is already strongly profitable and is poised to
get more lucrative still.
"In the aftermath of the report, the stock shot up to a record
high, moving well above our buying point. Stifel raised its price
target up to $85 [$42.50 split adjusted], while Howard Weil raised
its sights to $91 [$45.50 split adjusted] and Oppenheimer bid $100
[$50 split adjusted], suggesting upside into triple digits should
natural gas get significantly more expensive.
"The stock is likely to oblige, barring another collapse in
natgas prices that seems like a remote possibility at this point.
This is a position still very much worth building and we're raising
our price target accordingly. Buy COG below $85 [$42.50 split
adjusted]."- Robert Rapier and Igor Greenwald, The Energy
Strategist, www.energystrategist.com, 800-832-2330, July 29,
Before I go, as usual when I write about sentiment, I'm curious
to know how our readership is feeling. If you have a minute, reply
to this email and tell me your current feeling on the market.
Wishing you success in your investing and beyond,
Chloe Lutts Jensen
Editor of Dick Davis Investment Digest and
Dick Davis Dividend Digest