The Rude Awakening
Laguna Beach, California
Wednesday, December 13, 2006 - Santa Clause set to deliver a sour present to lazy investors,
- Bulls vs. Bears - the pre-season standoff begins,
- What goes up must come down, the insiders place their bets and plenty more…
Eric Fry, reporting from Laguna Beach, CA… "Markets make opinions," goes the old saying on Wall Street. The bear market in housing, for example, has made the opinion that the stock market is the place to be. Not so long ago, of course, the bear market in stocks had made the opinion that real estate was the place to be. Markets also make euphemisms. In the anxiety-ridden housing market, for example, a few notable euphemisms have emerged. When an anxious home-seller slashes the asking price of his property, he is not "dropping the price," he is merely "re-positioning." Or when a home-seller lists his property below the price of comparable properties, he is said to be offering a "drama price." Call it what you will, "re-positioning" and "drama pricing" are simply euphemisms for the "trauma pricing" that has become endemic in the U.S. real estate market. So bad has the housing market become, that the stock market, by comparison, seems like a tranquil, all-season refuge for capital. It is not, of course. But after seven straight winning months and a 15% cumulative gain, investors begin to expect an eighth winning month…and a ninth…and a tenth…along with additional double-digit gains. Such complacent attitudes tend to arise just about the time the stock market is preparing to take a tumble. As another fruitful year of stock market investing draws to a close, everyone knows that stocks are a "buy." In the early days of a new stock market rally, however, very few investors believe that "stocks are a buy." In fact, most investors believe that "stocks are a sell." But as share prices climb, the stock market begins to make increasingly bullish opinions. The opinion that "stocks are a buy" progresses from being a "fringy notion" to a "viable thesis" to a "pervasive belief" to "common knowledge." Unfortunately, once it becomes common knowledge that stocks always go up, they usually start going down. The opinion-making process begins to head in reverse, sometimes rapidly…as share prices begin to fall, sometimes rapidly. Eventually, share prices fall so unremittingly that "stocks are a sell" becomes common knowledge. And that's about the time that stocks become a "buy" again. At the moment, it is common knowledge that stocks are a "buy." Consider yourself forewarned. --- Special Crisis Report ---
The Final Countdown to Economic Disaster These "Wealth Fortress" Investments Are Your Last Chance for Total Protection The clock is ticking - and three SHOCKING events threaten to wipe out investors by Dec. 31, 2006. But one of the world's most famous market analysts has revealed his favorite strategies for surviving - and thriving in - the crisis he sees ahead. This may be your last chance. Don't miss this rare opportunity to get rich while protecting your money. Get the details here. ----------------------------- Markets Make Delusions
By Eric J. Fry Betting against a year-end stock market rally is a little like betting against tomorrow's sunrise. Even so, we think this might be a bet worth taking…against a year-end stock market rally, that is. It is a fact that year-end rallies arrive almost as reliably as the daily sunrise. Only 13 times in the last 78 years has the stock market fallen between December 13 and New Year's Eve. In other words, it has rallied 83% of the time. That's why the so-called "Santa Claus Rally" has become a canonized article of faith on Wall Street. Everyone knows that it will arrive every year. The year-end rally does not only arrive predictably, it also arrives powerfully. It seems to overcome whatever macro-economic obstacles stand in its path. Despite the ravages of the Great Depression, for example, and the traumas of the Second World Ward, the Santa Claus Rally arrived each and every year from December 1934 through 1953 - a 20-year span that delivered average year-end gains of 3.0%. More amazing still, the cumulative gains from these 20 year-end rallies totaled 86% or more than half of the stock market's total gains during this 20-year period. We must remember, however, that these awe-inspiring statistics merely suggest probabilities. They do not guarantee anything. Last year, the stock market slipped 1.4% between December 13th and New Year's. So could it not fall again this year? Sure, it could. But 73 years have passed since the last time the stock market stumbled during two consecutive year-end trading periods. In the back-to-back Depression years of 1932 and 1933, the stock market produced slim losses between December 13th and year-end. But 2006 is not a Depression year…except for the short-sellers of emerging market stocks. 2006 is a celebration year. The housing market may be crumbling, Iraq may be imploding, the dollar may be collapsing and the ice caps may be melting, but the stock market seems to celebrate it all. Since bottoming out at 10,706 on June 13, the Dow Jones Industrial Average has soared more than 1,600 points - or 15.2% - without ever pausing to enjoy the views on the way up. Share prices have been rising for so many months now that most investors trust stocks to continue rising. It is common knowledge that stocks are a "buy." Unfortunately, "common knowledge" might just be a polite phrase for "mass delusion." Stocks are not always a "buy," especially not when everyone knows they are. "At the moment, investors are feeling extremely confident…maybe too confident," we observed in the November 30th edition of the Rude Awakening. "…[I]nvestor sentiment has become too bullish for the market's good. "To anticipate short-term market action," we noted, "it sometimes pays to monitor the collective attitudes of investors. When they are feeling extremely pessimistic, stock market rallies often begin. And when they are feeling supremely confident and complacent, share prices tend to fall. At least, that's the bedrock assumption that inspires 'contrarian investing.'" Since highlighting extremes of bullish sentiment in our November 30th column, the Dow and the S&P 500 have gained slightly, while the Nasdaq and the Russell 2000 have dipped slightly. In short, the market has gone nowhere. But we think it's about to go somewhere…like down. Over the last two weeks, most measures of investor sentiment have become even more extreme. 59.8% of the investment advisors polled by Investors Intelligence are now bullish - that's the highest bullish percentage of the year. By contrast, only 23.9% of advisors are bearish. In other words, bulls outnumber bears nearly three-to-one. That's not a favorable omen for share prices. These latest readings stand in stark contrast to the downbeat sentiment readings of mid-June, when the bulls and bears were dead-locked at 35% apiece. "Historically, bulls are 55% to 60% when indexes achieve record highs," according to Mike Burke and John Gray, the editors of "Advisors Sentiment" from Investors Intelligence. "Those extreme levels of optimism often prove negative, as they reflect fully invested positions leaving little cash for additional purchases." The recent stretch of seven positive months for the Dow Jones Industrial Average is the longest monthly winning streak in more than 10 years. The stock market's monthly, weekly and daily gains of the last seven months have not been particularly large, all totaled, but they have been amazingly steady. So it is little wonder that investors have become excessively optimistic. Seemingly effortless stock market gains have a way of lulling investors into a state of comfortable complacency. "Days, weeks and months without meaningful losses can become psychologically empowering," Burke and Gray explain, "prompting reckless investors to 'lift the offers,' thereby putting in a major top. We do not say that we have reached this point, but…there are any number of things to worry about here." In addition to the worrisome jump in bullish sentiment, Burke and Gray also note a "marked increase in insider selling." "There are 19,976 reasons to be worried," warns colleague Graham Summers, editor of Inside Strategist. That's the number of corporate insiders who sold shares in their own companies last month. "Insiders sold $4.5 billion worth of stock in November," Summers observes. "With a paltry $33 million in buys, this brings the insider sell/buy ratio to 136 to 1 - more than six times its historic average. "This is the highest the insider sell/buy ratio has ever been," Summers continues. "If it holds up, we're in for a very rough end of the year and fist quarter of 2007. Even if the ratio falls, the market's near future doesn't look too promising. Altogether, 19,976 corporate insiders sold their companies' shares in less than a month. By headcount, that's more than three times the number of insiders buying." Heavy insider selling, extreme bullish sentiment and frothy market action do not guarantee an imminent top in the stock market, but neither do they signal a low-risk buying opportunity. Place your bets. Joel's Note: Perhaps these 19,976 insiders are just cashing up before the Christmas spending season. Hmmm… More likely is that they know something we don't. These CEO's, CFO's and board members all enjoy privileged knowledge of the intricate workings of their companies. They have their fingers on the pulse and are generally way ahead of the herd when it comes to buying or selling their own stocks. If you would like to know what they are selling, what they are buying and to what extent they are willing to put their money where their mouth is, you would do well to take a gander at James Boric's newest trading service, the Small-Cap Insider. By pouring through legally published reports detailing the inside buying and selling of companies, James is able to pinpoint spikes in insider sentiment…and cash in on them early. See how it's all done right here. The Inside Track --- Special Report --- The Directors of this $300 Million Company Have Spoken… …to the tune of $694,324 in insider buying. The CEO laid down 22% of his salary to buy stock, and the CFO followed suit to the tune of 31%. There's one reason why execs buy like this. The stock is going to explode. To learn more, click here. | 
