Thursday, April 21, 2005

Contrary thoughts on the US stock market

I like to track the state of market sentiment by keeping a scrap book filled with items cut out from local and national newpapers and magazines. I learned this technique from a fellow named Paul Macrae Montgomery who publishes a newsletter called Universal Economics .

Back in the early 1980's Paul got the clever idea of looking at the covers of Time Magazine for clues about public sentiment on economic questions. The basic idea is that magazines are in the business of telling people what they want to hear. So, when Time publishes a cover like the one of July 29, 2002 asking people if they ever will be able to retire since stocks were then plummeting, you can fairly conclude that public sentiment about the stock market is fearful and bearish and that a low point in the stock market averages is near at hand. And that is exactly what happened in this instance.

The same principle works when applied more broadly. I prefer this method for gauging public sentiment to the more mechanical (and more popular) ones which rely upon surveys of investor or market newletter sentiment. My method requires a lot of experience to use well but is in my opinion much more reliable.

Since March 7, 2005 the Dow Industrial Average has dropped nearly 1000 points from a high near the 11000 level while the S&P 500 has dropped from 1229 to 1140 during the same time. Yet on April 16, April 18 and and April 21 the national edition of the New York Times had front page (above the fold) stories (one a headline) on the stock market:

April 16: " Stocks plunge to lowest point since election"

April 18: " As stocks slide, investors focus on earning data" (headline)

April 21: " Inflation fears pummel stocks"

I cannot remember the last time the NY Times printed negative, front page stock market stories within such a short time frame. My conclusion: The stock market has either made its low or will soon do so, only a few percentage points below current levels. By the end of the year look for all the major averages to climb well above the high points established in March 2005.

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