BULLS-BEARS RATIO BUY SIGNAL?

Bulls--Bears April 2005 (click on photo to enlarge)

The market decline of the past few days has probably shot the Bulls to Bears ratio to a solid buy signal. If one recalls the dates of prior market bottoms, one can easily see that the Bulls to Bears Sentiment Ratio is a not great but good indicator of market bottoms.

The last time the indicator screamed BUY was in October of 2002. I "loaded up the truck"! I purchased NXTL, EBAY, YHOO, and many others. The returns were fantastic. I still own many of the stocks and have 300, 400, 500 and 600% returns on them. A few of the stocks did not do extremely well until after the indicator was very strong again in March of 2003.

The most recent strong BUY signal was flashed the first week in August of 2004. The market made a great run from August to the end of the year.

There are no precise indicators. In the past 5 years there have only been two screaming buys. The percentage of bears exceeded the percentage of bulls twice; the first time in late September of 2001. It was hard for anyone to be optimistic soon after September 11. Naturally the Fed loosened the money purse and stocks did quite well. In October of 2001, I told a meeting of executives that the Fed was loose. I told them that companies could borrow money to buy back their own stocks or bonds at paltry rates and the Fed had suspended restrictive regulations. The Fed was in effect handing profits to anyone with the fortitude to pick them up! The reaction was muted as these guys were as scared as most others in the country.

From February-March of 2003 until August 2004, a good time to ride the bucking bull, the sentiment stayed positive; sometimes extremely positive. The ratio was as has as 3.6 to 1. The problem is that the indicator does not give good sell signals. When the indicator is more than 2.5 to one, it is wise to be less aggressive because you can never tell when the down turn will come. It took months of a sideways sloppy market in 2004 before a decent BUY signal was made in August of 2004.

The ratio of Bulls to Bears last week was almost as low as the August 2004 bottom. Chances are good that the ratio is now at a two year low going back to the rising ratio after the February-March 2003 bottom.

There is one more problem to confess. After a long extended run, it sometimes takes the second BUY signal to confirm the first one. In the current case, the last run from August to December of 2004 was not anything like a "super bull". Furthermore, the current economic environment for stocks is very good. Stocks normally do well when there is solid economic growth with low inflation.

The natural market play at this point in the business cycle is to hunker down in defensive stocks. There is clearly a stampede out of oil after such a long stampede into oil. I have had my biggest gains when I have made the contrary play.

Next week, I will probably add beta to my portfolios. In other words, I may sell some of the big solid slow moving companies to acquire more aggressive positions. I may be a little early as there is definitely fear in the market. I am sure you know Warren Buffets famous comments about fear but it is a good time to repeat them. Warren said there are only two emotions that move the market, fear and greed. He went on to say that the secret to investing is to buy when others are fearful and to sell when others are greedy.

Now is not the time to slam money into savings accounts or t-bills. The next big move up is being set up. It may require suffering to be there to catch the big pop. I plan to be there.