Olé! Getting to grips with the stock market bulls

June 20, 2013


The stock market bulls were out in force again in the latest Reuters poll of equity analysts and investors, conducted this week.

Taking the consensus at face value, further gains for stock markets look a sure-fire bet. However, their forecasts ought to be taken with a dose of common sense and a basic grasp of how the past has panned out.

Part of the reason for their optimism is simple herd mentality – that a positive view of the stock market will be mutually reinforcing.

And Thursday brought a pertinent reminder that sometimes reality cracks the market fervour. Shares fell sharply around the world after the U.S. Federal Reserve explicitly signaled it would start easing off its stimulus measures that have sent stocks rocketing over the last year.

Published on Tuesday, the latest Reuters poll collected more than 500 points of data from hundreds of analysts worldwide on how 20 of the world’s biggest stock markets will perform between now and the end of the year.

Some 86 percent of those responses forecast a positive return between now and the end of the year.

That’s even more the case for Asian shares – namely in Japan, China, Hong Kong, South Korea, Taiwan and India – where an astonishing 94 percent of all forecasts project an increase.

The hugely optimistic forecasting for Asian stocks is as much down to analysts playing catch-up as it is a vote of confidence in these markets.

Japan’s Nikkei being the notable exception, these indexes are all in negative territory for the year. In the March poll, analysts expected most of them would have rebounded by now.

A little historical perspective is also necessary.

Share prices had already started to fall by the time the June 2008 stock markets poll was conducted, a few months before the collapse of Lehman Brothers.

Still, 82 percent of the forecasts in the poll pointed to a recovery in the months ahead, rather than a crash. In fact, 22 out of 26 analysts who answered an extra question then thought the worst had passed for stock markets.

And it was a similar story in the June 2011 poll, when respondents were supremely confident the market would bounce back, instead of being dragged down by the escalating euro zone crisis.

So what is the use of these polls if the consensus is so often wrong?

A small minority did call it right, both in 2008 and 2011. Like everything else about the economy and financial markets over the last few years, the real story lies around the margins of mainstream thinking.

 

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It could be the beginning of the expected 10% correction.

From my new book Debunk the Myths in Investing (from amazon):

Many including myself do not believe a market plunge is coming as of 6/2013. The pumping of money creates a non-correlation of the economy and the market cycle (Chapter 38). However, we have to be careful with the following analysis. Run the simple chart described in Chapter 39 to spot any indicator of the market plunge.

o Among my top-performing screens for the last 3 months, there are more top screens from the peak stage (defined by me) than other stages in a market cycle.

o The typical market cycle is about 4 years. We have about 6 years since 2007.

o The stock market does not reach the bubble stage. It will if it continues to rise in this pace.

Posted by TonyP4 | Report as abusive