NEW YORK (CNN/Money) -
It's an old Wall Street saw that stocks must climb a wall of worry, that the best time to buy is when everybody's nervous and things look the bleakest.
Such a wall has been building for much of this year, and some analysts say it looks high enough now for stocks to climb.
Others, though, don't think there's quite enough worry yet. Stocks have climbed since mid-May, and they added to those gains last week. The Dow Jones industrial average gained 1.6 percent, the S&P 500 gained 1.2 percent and the Nasdaq gained 1.1 percent. (For a list of key events this week, click here.)
But volume's been woefully light during this mini-rally, and there are still plenty of signs that bearishness holds sway on Wall Street.
The volume of bearish put options on the Chicago Board of Options Exchange (CBOE) has matched or exceeded the volume of bullish call options for more than a month. Though they retreated a bit last week, they're still well above their lows at the market's peak in January.
Meanwhile, surveys of big and small investors have shown entrenched nervousness. An example of institutional caution was the most recent Merrill Lynch fund managers' survey, which found a growing number of managers running from riskier assets and taking more cash out of the market.
That survey was taken in early May, but the caution has carried over into June -- on Wednesday night, the Standard & Poor's investment policy committee recommended that investors cut back on U.S. and foreign equities.
The bearishness seems to have infected smaller investors, too. Lowrisk.com's weekly sentiment survey found some 64 percent of investors were bearish or neutral last week, despite the market rally, compared with 53 percent the week before.
"Sentiment now is very bearish," said Andy Engel, senior research analyst at the Leuthold Group in Minneapolis. "We view this as a good sign for the market, going forward."
Market analysts like to see extremes in investor sentiment, on the assumption that most people are usually wrong about what the market will do next. When bullishness was at a peak late last year and early in 2004, Engel said, the Leuthold Group wisely cut its exposure to stocks.
Now, when everybody else is gloomy, they're getting happy again, and they're not alone.
"If you look at the fundamentals, the economy is looking great, and earnings are looking great," said Ozan Akcin, chief market strategist at Puglisi & Co. "In three or four weeks, we'll be in reporting season, and the pre-announcements have been bullish."
"The markets have been too cautious in the past few weeks, so it might be a good time to buy on the back of good earnings," he added.
Then again, not all gauges point to excessive bearishness in the market just yet. For example, the CBOE's Volatility Index (VIX), a closely watched measure of investor nervousness about the potential for choppy trading in the future, has stayed at stubbornly low levels for months.
"There doesn't seem to be the overwhelming pessimism that you typically see at a bottom," said Charles Blood, director of financial markets and economic analysis at Brown Brothers Harriman. "I think the market's vulnerable on the downside."
Blood is also worried about the prospect for higher interest rates, which are usually a bane to stock prices. Higher rates have already been priced into the market to some degree, during the market's anemic phase this spring.
But if the Fed's planned approach to interest-rate hikes -- slow and steady -- has to be scrapped due to stronger-than-expected inflation, or if the recovery in the economy and earnings is not as strong as analysts expect, then the market's nervousness could be justified.
The coming week will bring a hint of the future course of inflation in the Bureau of Labor Statistics' consumer price index (CPI) for May. Economists, on average, believe "core" CPI, stripping out food and energy prices, will cool off. If they're wrong, fear of a faster Fed could grow.
The deck is loaded with wild cards, too, including the situation in Iraq, oil prices, the threat of terrorism and the U.S. presidential election.
Still, many analysts are willing to look past the fog of all this stuff and bet on their faith that the economy and earnings are on an upward trajectory strong enough to take stock prices up with them.
"What I see is this pervasive opinion that there will be a better time to buy stocks and that we'll all know it when it comes," said Phil Dow, stock market strategist at Dain Rauscher. "But it's never that way. The only way to participate in a market recovery is to be in it beforehand."
Key events in the week ahead:
- On Monday morning, the Commerce Department kicks off an extremely busy week for economic data with its report on retail sales in May. Economists, on average, expect sales to rise 1.0 percent after falling 0.5 percent in April, according to Briefing.com. Excluding autos, sales are expected to rise 0.4 percent after falling 0.1 percent in April.
- Tuesday morning brings one of the most important economic releases of the week, the Bureau of Labor Statistics' consumer price index (CPI). Economists, on average, expect the CPI to rise 0.4 percent after gaining 0.2 percent in April. Excluding food and energy costs, the "core" CPI is expected to rise 0.2 percent, after April's 0.3 percent gain.
- Tuesday morning would have also brought the BLS' producer price index (PPI), but for some reason the department is again having problems crunching those numbers, and the PPI release has been delayed indefinitely.
- The Senate Banking Committee's nomination hearing for Alan Greenspan, recently nominated by President Bush for another term as Fed Chairman, begins Tuesday morning. The committee will then make a recommendation to the full Senate, which will vote on whether or not to reappoint the 78-year-old Greenspan, a vote that should have all the suspense of a Harlem Globetrotters game.
- Also on Tuesday, the New York Fed will release its index of New York manufacturing activity in June. Economists expect the gauge to slip to 28.5 from 30.2 in May.
- Finally on a very busy Tuesday, the University of Michigan releases its measure of consumer sentiment for early June. Economists, on average, expect sentiment to rise to 91 from 90.2 in May.
- On Wednesday, the Commerce Department will report on housing starts and building permits in May. Economists believe starts slowed to an annualized pace of 1.95 million units, compared with a 1.97-million-unit pace in April.
- Also on Wednesday, the Fed will release its index of national industrial production and factory use in May. Economists expect industrial production to rise 0.6 percent, compared with 0.8 percent in April. Capacity utilization is expected to rise to 77.3 percent from 76.9 percent.
- Wednesday afternoon, the Fed will release its fourth Beige Book of the year. The periodic report is a compilation of anecdotal evidence from the nation's 12 Fed districts and will inform the Fed's decision-making at its June 29-30 policy meeting.
- On Thursday, the Labor Department reports the number of new claims filed for unemployment benefits in the week of June 12. Claims jumped in the prior week to the highest level in seven weeks.
- Finally on Thursday, the Conference Board, a private research firm, releases its compilation of leading economic indicators. Economists believe the LEI rose 0.4 percent in May, compared with 0.1 percent in April.
|
