Thursday, December 04, 2008

The great "bear market rally" post

So, the question before us today is: "are we due for a bear market rally in shares?".

Let me say up front that I have no idea whether or not the greatly expected bear market rally will materialize anytime soon.

Having said that, let's hear from some gentlemen who have recently expressed their views on this topic publicly: investors Barton Biggs and Marc Faber.

Hedge fund manager and author, Barton Biggs recently offered his opinion in a Financial Times comment piece entitled, "The mother of bear market rallies is on the horizon".

Noting at the outset that he had misjudged the "severity and duration of this panic", Biggs goes on to say that stock valuations are cheap and that global markets have been battered and "are deeply oversold". When combining these factors with the pervasive negative sentiment, he finds that we may soon see the setup for a significant bear market rally.

Here's an excerpt from Biggs' piece:

"The systematic work that we do on measuring sentiment (and we monitor about 20 indicators for the US and a dozen or so for other equity markets) show very extreme and in many cases record levels of bearishness. Obviously not every indicator is at an all-time high, and in some the history is short - but the message is powerful.

Furthermore, there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash. I am chastened by the fact that all the data we look at are from the past 40 years, which was really just one great magnificent secular bull market of wealth creation marked by periodic bears that were opportunities to buy. No one knows what levels of pessimism were necessary to spawn the 40 per cent 1929 rally during a massive secular bear market.

Nevertheless, I've never seen capitulation and despair like this. We must be pretty close to maximum bearishness."

Don't get too excited by Biggs' optimism; he notes that he is still hesitant to commit himself until he sees further signs of a bottom. However, for those waiting in the wings, looking for a more optimistic view for the stock markets, Biggs' note might provide some food for thought.

Onto our second guest forecaster, Marc Faber. Whereas Biggs is rather optimistic that the worst case scenarios for the global economy will not pan out, on this point Faber does not shy away from this reputation as "Dr. Doom".

He says that the global economy is going into a severe recession, with emerging market economies being hit the hardest. In fact, during a recent Bloomberg TV interview, Marc said that the global economy "is imploding". He expanded upon these points in a seperate Bloomberg radio interview.

In spite of this gloomy outlook, Faber says that a near-term rally is quite possible for shares, given their recent sharp declines. However, he cautions that traders will probably have to be alert and exit their positions in stocks and index futures by early next year.

In fact, Faber's view of the next few months may also turn out to be a preview of the next decade for traders and investors. Marc recently told CNBC that we are now in "a traders' market", and that Warren Buffett's buy-and-hold approach to investing is dead for the next 10 years.

What lessons have you learned from this latest bear market in shares? Are you taking the view of a trader, or that of a long-term investor in shares?

Maybe this market will require or reward some synthesis of the two disciplines (trading/speculating vs. investing). What do you think?

Related articles and posts:

1. Responding to bear market conditions - Finance Trends Matter.

2. "Faber: Buffett buy-and-hold method dead" - MoneyNews.

3. Bear market rallies since October 2007 - Big Picture.

4. "Where have all your savings gone?" - The Economist.