Making Money Alert
On the Contrary
02/08/2012
Being a contrarian is often a difficult assignment. That’s because everyone wants to go along with the crowd, especially if the crowd has been struck with an acute case of bull fever. There’s been a big outbreak of just such an ailment so far this year, and that bull fever continues to heat up nearly every segment of the equity markets.
The gains we’ve seen in 2012 have indeed been impressive, and I’m not going to deny that the smart money is back to betting big on stocks. However, the move higher this year doesn’t change my opinion that the markets are headed for a serious pullback. On the contrary, the sharp rise of nearly 6% year to date in broad market indices such as the S&P 500 Index has me even more convinced that this market is primed to roll over.
Why am I still donning this contrarian robe?
Well, I can assure you it’s not for the sake of being different. If I truly thought stocks were able to sustain their current uptrend, I would be “all in” within the various portfolios of my investment advisory newsletters, and with my money management clients.
The way I see it, the negatives out there easily outweigh the positives, and I think the market is starting to realize that the gains through the first five weeks of the year are ultimately unsustainable. Now admittedly, from a technical perspective, the market does look bullish, as stocks now trade well above both their 50- and 200-day moving averages. Fundamentally, however, there are big problems beginning to rear their ugly heads.
Think about why stocks are moving higher right now? The answer is an improving U.S. economy, and the hope that Europe’s issues will be worked out.
Here’s where I think both of these near-clear catalysts break down upon further scrutiny.
The problem with the first reason is that the U.S. economy is by no means seeing signs of strong growth. Rather, we are merely seeing metrics such as gross domestic product (GDP) growth and employment data besting already deeply depressed expectations. Given this context, I can’t get very bullish on a convalescent U.S. economy. This caution is particularly valid, given the potential downside from a misperception of the second reason the market has rallied, Europe.
The problem with the belief that Europe will be able to successfully cope with its looming fiscal issues really suffers from a gross underestimation of just how bad things are in countries such as Greece, Ireland, Italy, Portugal and Spain. I think traders are overestimating how quickly and efficiently any European Union or European Central Bank policy response can be. As a result, the bulls could be setting themselves up for a big disappointment.
Until the bad taste of these issues is cleared from the market’s palate, I will remain a contrarian -- and I will continue approaching this market with the utmost caution.