Stock Experts In Typical Disagreement

The following exclusive report is from Dave Van Knapp of Sensible Stocks, a frequent contributor to this site:

It’s not unusual for “the experts” to disagree on where the market is headed, but the mid-summer credit crunch seems to have sparked a special debate. Here are three expert points of view culled from last Friday’s news (October 5, 2007).

From “Daily Trader’s Alert” by Sam Collins and his accompanying article at ChangeWave:

At times like these, the sentiment indicators are often referenced in order to give some idea as to where the “smart money” (i.e., hedge funds, institutional traders) is going and whether it is heading in the opposite direction of the “dumb money.” (The latter is generally considered to be the investment advisers and the public.)

Recent reports from Investors Intelligence (which tracks the advisers) and the American Association of Individual Investors (AAII) (which follows the public) show that both advisers and the public are now strongly bullish — and that’s not good.

In fact, in July — just three days after the failed market breakout — both were at the most bullish levels in months. And in August, again just three days following the market low, both were very bearish.

Now, both are very bullish. And so, you may be wise to continue to hold some cash rather than taking a flyer on the latest tip from your barber.

So Collins is bearish.

But consider John Waggoner’s Friday column in USA Today.

Experts point to the fact that investors pulled more money from stock mutual funds in August than in any month since June 2006 as evidence that mutual fund investors (dumb money) have remarkably bad timing at pinpointing market bottoms.

Mr. Waggoner wrote: “Over the years, Wall Streeters have found different ways to watch what the smart money is doing. In theory. . .you’ll make good money doing the opposite of what the public [dumb money] is doing. . . . Mutual fund flows are a classic contrary sentiment indicator, under the classic Wall Street belief that the public tends to buy high and sell low.”

Stock funds had a net outflow this August (the last month for which data are available). The last time funds had a net outflow (June 2006), the S&P; 500 gained 14% in the next 12 months. In August 1998, there was a net outflow, and the market gained 26% for the next 12 months.

Mr. Waggoner concludes, “Buying when most of the public is selling is usually a pretty profitable move. . . . In short, it’s better to run to your fund than away from it when other investors are fleeing.”

So, looking at virtually the same data as Collins (smart money versus dumb money), Waggoner reaches the opposite conclusion and is bullish.

Waggoner also points out that TrimTabs, which tracks flows of money into and out of the market, is bullish for a different reason: stock supply is shrinking because of all the buyback programs. “We have never seen a contraction like this,” said Conrad Gann, TrimTabs’s president.

By my count, that’s one expert (Collins) who is bearish, one (Waggoner) who is bullish based on the same data, and one (TrimTabs) that is bullish for an unrelated reason.

Jason Kelly and I “put in the call” to enter the market at the end of August and in early September. Of course, we don’t know what the next few months have in store, but so far, here are the results of my own stock purchases beginning in late August:

  • Apple – purchased 8/27 – up 20%
  • Bank of America – purchased 8/20 – up 2%
  • Berkshire Hathaway – purchased 8/31 – up 1%
  • Chevron – purchased 9/20 – down 2%
  • Cummins – purchased 8/27 – up 21%
  • Diageo – purchased 8/31 – up 7%
  • Diana Shipping – purchased 9/27 – up 8%
  • GE – purchased 9/25 – up 3%
  • Goldman Sachs – purchased 9/21 – up 10%
  • Johnson & Johnson – purchased 8/20 – up 7%
  • McDonald’s – purchased 9/17 – up 2%
  • Noble Corporation – purchased 9/24 – down 6%
  • Pepsico – purchased 8/31 – up 8%
  • Powershares QQQ Trust – purchased 9/21 – up 5%
  • Raytheon – purchased 8/31 and 10/1 – up 1% (averaged)
  • Spider BRIC (Brazil, Russia, India, China) ETF – purchased 9/20 – up 12%
  • Synchronoss Technologies – purchased 9/25 – up 5%
  • United Health – purchased 8/20 – down 5%
  • Zoltek Companies – purchased 8/27 – up 11%

You can see that there are a variety of conservative and aggressive investments, large and small caps, and so on. The simple average of those purchases is up 6.4% in an average of about 4 weeks. Sixteen of the 19 positions are up, and their average gain is 7.7%.

Don’t be deceived by the large number of purchases. I am not a short-term trader. (Several of these purchases were additions to positions I already held.) But I had some money to put to work, and when the time seemed right (and my evaluations of the companies and their valuations were encouraging), I put it to work. I am essentially “fully invested,” as they say.

So far, the main bases of my bullish call — the rate cuts, money infusions, and verbal signals of the Fed — remain in place. I continue to believe the market will be higher in February (six months after the call) than it was in August.

Things are off to a great start.

Indeed things are off to a great start in the past month. As I pointed out over the weekend, The Kelly Letter’s permanent portfolios rose an astounding 29%, 14%, and 14% since I changed our stance from medium-term cautious to medium-term bullish.

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