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November 16, 2005

Bet Your Money on a Sure Thing
by Keith Kennedy

If the opinions of the investment advisors with free newsletters and web site market forecasts are to be believed it is a sure thing that the market will be higher at the year end. You can bet money on that. Of course, nobody is going to cover your losses if you lose.

The FIFTI ¹ (Free Information From The Internet) Index from www.InvestorsInternet.com was at its most bullish for the year end a week ago (88% bulls). This week, after three consecutive weeks of advancement by the major indexes, some bulls are wondering if that is too much of a good thing. This week they have pulled back to a more neutral opinion. The latest FIFTI Index of investment advisors with free newsletters and web site market forecasts is at 70% bulls and 5% bears for the year end.

In the past three weeks (Friday to Friday) the Dow gained 471 points, the S&P 500 added 55 points and the Nasdaq piled on 120 points. In fact, that impressive performance has only recouped the losses from the start of August, and not even that for the S&P 500. Doesn't that mean the market is still in a trading range? "No", say the bulls, the Nasdaq 100 is leading now, and look at the Dow Transportation Index go.

The arguments by the bulls certainly have some merit. The market has taken little notice of bad economic news in the last few weeks. Higher deficits, inflation, and the potential for an inverted yield curve barely rate a mention. A topping housing market is so confounded by continuing strong consumer spending that retailers are reappearing on buy lists. Sectors, chart patterns, Elliott Waves, technical indicators, cycles, Wall Street bonuses and falling oil prices are the arguments that the bulls use to predict an S&P 500 at 1,270 by the year end. That would be a 5% increase for the year and give rise to plenty of analysts and investment gurus saying "Told you so".

The bears have almost disappeared from sight, at least for the year end forecast. They are still around, though diminished, for the very short-term and they are still in the majority for the long-term forecast. The FIFTI Index is at 56% bulls and 15% bears for the short-term, and 37% bulls and 50% bears for the long term.

The bears point out all the reasons the market shouldn't go higher by year end, but then admit that it is likely that it will. The market is overbought, technical resistance is just above, indicators are rolling over, market internals are not good, and there is too much bullish sentiment are the current arguments. Add those to the fundamental arguments about interest rates, falling consumer confidence, negative savings rates, lower forecasts for company earnings, terrorism and low popularity ratings for the President and you have a convincing set of logic for the bears as well as the bulls.

The arguments for the bulls and the bears are particularly fascinating when you see, at respected Web sites this past weekend, statements such as "the current P/E of 16.6 represents good value given the interest rate and earnings outlooks" and "with the S&P 500 at about 19.5 times record trailing net earnings (the average historical multiple on record earnings is about 12, regardless of the particular level of interest rates or inflation), even the recent market advance has failed to exhibit much evidence of sponsorship or favorable information". No wonder the poor investor is confused.

Which way will the market go by year end? Even a contrarian would find it hard to bet against all those Wall Street bonuses.

¹ The FIFTI Index is based on Free Information From The Internet, and in particular, on advice provided by fifty independent newsletter writers selected from the book "The Investor's Free Internet".

Keith Kennedy Ph.D.
www.investorsinternet.com

Dr. Keith Kennedy has many years experience as an investor and has an extensive background in management consulting. He has advised stockbrokers, banks, insurance companies, professional firms, commercial and industrial companies on solving their information problems. His career includes a Ph.D. in engineering, positions as a Managing Director for one of the "Big Four" management consulting firms in the U.K., Chief Executive of an information technology and consulting firm in England, and years of experience as a Principal of a management consulting firm in the USA.

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