CREDIT SUISSE: BUY THE DIPS – THE BEAR ISN’T HERE YET

Strategists at Credit Suisse entered 2010 with a very cautious tone and an outlook similar to our own – 2010 would be a year of halves.  The first half would be a continuation of the trends that helped the market surge in 2009 while headwinds would build near H2 2010 and result in market declines.   The recent downturn in stocks hasn’t changed their outlook and they view the sell-off as a buying opportunity (see JP Morgan’s similar outlook here as well as Raymond James’ outlook here).

The team’s tactical indicators are mildly bullish at current levels and quickly approaching levels that were buys in 2009:

Our tacticals are mildly supportive of equities:
Interestingly, the % of nyse stocks trading above their 10-week MA (currently at 32%) is around similar levels where market bottomed during recent corrections (end of Oct it troughed at 30%, in early July 09 at 37%). Normally a buy signal is when this indicator falls below 20% but perhaps most of the correction has already occurred??

Sentiment data also supports their bullish thesis as the majority of investors remain net bearish:

Like us, Credit Suisse sees continuing strong trends in the earnings picture which makes it very difficult to formulate a thesis for a substantial decline in stocks.  Credit Suisse notes the very strong trend in earnings expectations, the high level of “better than expected” earnings and the uptrend in the upgrade cycle.  Bespoke recently noted the outperformance on Monday’s over the last few months.  This has been largely due to the upgrade cycle.  Yesterday alone, there were 41 upgrades of S&P 500 firms versus 13 downgrades according to Briefing.com.  One of the primary reasons we focus a great deal of our research at TPC on the earnings cycle is due to the high influence analysts have on the market.  According to Credit Suisse, analysts on average, upgrade stocks for 11 months prior to the beginning of a new uptrend in the bull market cycle.  This means we could see a strong continued trend in upgrades until Q2 of 2010 – roughly around the same time where we believe earnings outperformance will begin to dip substantially and earnings estimates will begin to rise dramatically.

All of this leads Credit Suisse to maintain their bullish stance:

Bottom line: we are not changing our fundamental view and stay overweight equities targeting 1,220 on the s&p by mid-2010. We admit that near-term pressures remain: (i) worries about China’s “tightening”- which we think are exaggerated, (ii) Greece (and rest of peripheral Europe)- we have been negative on peripheral Europe for a while, especially Spain (we would u/w domestic Spain); (iii) Obama’s proposal on banks (uncertainty unnerves investors, we are underweight Eur banks). We would buy equity on dips, especially plays on Chinese consumer (e.g. luxury goods).

Source: Credit Suisse

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • zrch

    An interesting take by a guy who has 40 years trading copper and called a crash in 1996. Says we are due for a repeat due to Chinese hoarding. I believe TPC was tracking copper just last week as a reason to stay long.

    http://www.fundmymutualfund.com/2010/02/trader-who-called-1996-crash-in-copper.html

  • LZ

    Yet what I found interesting is all bullish reasons based on earning “suprise”, not how much the shares should be worth. so those who forget to sell the news are going to pay deep price.

  • anon

    So, we should all BUY here so that we can sell mid year @ 1200 or so? But, who will buy mid year @ 1200 from us. All those, who dont read CSFB? Great! Lets keep this a secret.

  • http://www.pragcap.com TPC

    Anything even remotely bullish is always received very poorly here at the site. It’s a really interesting fact that I have noticed since I started the website. I wonder why that is….People appear to still be very frustrated with the state of the economy and the rally….

  • nkyhilljack

    One of the most difficult tasks we face as traders is to realize the market doesn’t care what we think. Regardless of whatever indicators or technicals we may subscribe to, the market can remain irrational far longer than we can remain solvent. I think the frustration for most traders comes from wanting the market to prove our position, be it bullish or bearish, so we can bask in the glory of being right. I hope to get past being right and focus on being profitable.

    One of the reasons I enjoy your site TPC is you force me to consider opinions which differ from my own. Keep up the good work.

  • http://www.pragcap.com TPC

    I try to emphasize emotionless investing, yet I still notice it here. No one likes a bullish story. I get it. I am frustrated at what the government has done, but like you said, the market could care less about what we think.

  • http://www.pragcap.com TPC

    It’s really interesting too….I absolutely love Garthwaite’s equity team at CS. They are top notch. If I had to pick two or three analysts to read they would be on the list. Their research truly is some of the best. So it’s interesting to see a piece of their research be received so poorly.

    There is this broad belief that if a big bank puts it out, it must be bad….Hating Wall Street’s most influential people won’t get an investor anywhere….I would just ask the reader to keep a more open mind. Sometimes it’s the worst research that gives you the best ideas….

  • anon

    TPC – i hear every strategist on the street saying the same thing. 1H better due to stronger earnings, less policy risk, better comps etc. 2H worse due to worse comps, closer to rate tightening etc.

    So if everyone agrees to that and buys now .. who do we sell it to in mid 2010?

  • http://www.pragcap.com TPC

    Who is actually positioned for that though? Last week everyone was selling everything. Now everyone is back on the recovery bandwagon. Sentiment, commitment of traders, cash levels, etc all say investors are still not positioned for a sustained rally.

    Talk is cheap. The actual positions flip flop every week and in the longer term remain net short/cash heavy.

  • http://www.pragcap.com TPC

    I should add – most strategists are actually calling for a sustained rally thru H2 and for the market to end much higher. The only two I know of who are actually calling for YoY declines are CS and MS.

  • anon

    I think average hedge fund is fully invested (150% gross, 30-40% net), Mutual funds obviously fully invested.

    Quite frankly no fund mgr listens to these strategists. Most i know are very long, thinking good 1H and bad 2H.

    But, sometimes consensus is right. We may rally in 1H and then collapse. The smart ones will get out at 1175 and not wait for 1200+

  • http://www.pragcap.com TPC

    That’s just not factually true. Money market funds remain 24% of market cap vs. the 18% historical average.

    Besides, I would argue that the cash levels are not the important factor here. It’s the sentiment levels that really matter and they are still low. A mountain of money has moved into bonds in the last year. If sentiment continues to improve that cash will slowly trickle out of bonds and into equities.

  • http://ourmaninnyc.blogspot.com/ Our Man in NYC

    I agree with TPC; the CS guys are good — I’d put them up there with Edwards (always makes me think, but strategic not tactical), Janjuah (bearish), and Rosenberg (only on US-centric stuff though).

    As for strategists; I think it’s a pre-requisite for any kind of downturn for them to be largely bullish, since if everyone’s expecting a downturn then it isn’t going to come. The fact is picking any turning point is very difficult (and big bank strategists are not paid to do it!) and we likely won’t know enough to confidently predict a V or W or Square-Root until at least March (and in truth probably well into Q2)…

    It’s also why, if there is a downturn, I suspect there’s a good chance it will go way further than people are prepared to consider.

    On a separate (but related issue) — what are people’s thoughts on Gold. I’ve pretty much come full circle, from being a bull to being a bear (in the short-mid term at least). After all, surely a prerequisite for an instrument to perform well in a flight to quality scenario…is that nobody wants to own it before that time?

  • LZ

    A lot of smart people subscribe the thoery “social mood shapes fiancial market”. It may not be true all the time but it is true sometimes. Angry people could do a lot of harm than good to society, just watch out. Next time when crap hits the fan it will not be contained in financial market.

    I think most people subconsciously figured out all these “recovery” “growth” stories after 2000 are part of a scheme to transfer their waelth away, to a few nations with resources and producing goods. a few uber rich could also make money to charge transaction fees.

    Bullish? sure, it is dead bullish but who cares?