Wednesday, March 15, 2006


Enthusiasm Could Signal Stock Top.

The Dallas News looks at investor sentiment. "Commodities, emerging markets and bond markets have given investors pause in recent weeks. The same can't be said of U.S. stocks, an exception some experts view as encouraging. Francois Trahan, Bear Stearns' chief strategist sees more than a few signs that U.S. stocks are simply going to be the last to throw in the towel. 'Peaks in the stock market typically have a number of similar characteristics,' he wrote recently. 'They are most often accompanied by tightened Fed policy, flagging economic indicators and a crescendo of investor enthusiasm.'"

"He added to this list a sense of denial among investors, or 'the reflex on the part of investors to rationalize a lot of the negative aspects of the market.' Mr. Trahan identified this resentment as a natural human instinct: 'Investors by and large want equities to go higher, and this can cloud their judgment.'"

"Take the current thinking on the Federal Reserve. If the Fed raised interest rates throughout 2005 and stocks managed to gain ground, well then, it can do the same in 2006. The difference is, last year monetary policy was accommodative. Today, mortgage applications have fallen 20 percent and signs of household debt stress have emerged."

"'Now is not the time to ignore monetary policy,' Mr. Trahan warned. 'If anything, now is the time to pay more attention to it.'"

"And that's just one thing U.S. stocks investors are ignoring. A few years ago, the current mix of geopolitical tensions, global health risks and fiscal irresponsibility would have raised investors' collective blood pressure. Judging by the stock market, one might conclude that Iran had complied like a kitten with the U.N., bird flu had been eradicated and the budget deficit had been cut in half."

"On the plus side, it remains to be seen whether long-term interest rates will breach the 5 percent level, something that hasn't happened in nearly four years. Most strategists have taken it for granted that long-term rates will get there, but I'd be careful about writing that chapter into the history books just yet."

"The catalyst for rates' recent spike is the concern that Japan's central bank will raise its interest rates significantly, something that would force U.S. rates upwards to compete for global capital. This theory makes perfect sense save one glaring detail that wasn't lost on J.P. Morgan senior economist James Glassman: 'The Bank of Japan announced an end to quantitative easing, but the market impact is more psychological than real. The BOJ will have to maintain low policy rates for a long time to enable the government to cut its budget deficit, which is three times that of the U.S. and Europe relative to GDP.'"

Even though it's up today, check out the VIX for an idea of how complacent investors are.

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