Furey’s Insights

Buyer Capitulation? Not Yet!

02/06/12 -

Buyer Capitulation?  Not Yet!

Turbo booster engaged.  The Russell 2000 is up 12.2% YTD, exceeding most optimistic 2012 annual return forecasts a mere five weeks into the year.  We retain our 2012 1000 price target, 20.3% above Friday’s closing price. We hate to say it for fear of jinxing our 2012 outlook but the year is playing out exactly as our 2012 forecast anticipated. 

With the Fed’s recent language extension through 2014 the Fed demonstrated beyond any bear’s reasonable doubt that it is committed as much as ever to:

• promoting extremely stimulative financial conditions,
• continuing to do everything in its power to assist the US and global economy’s growth,
• increasing confidence,
• easing the global banking system’s stress from the great ongoing deleveraging and the European debt crisis.

Buying capitulation complete?  Not close, in our view.  It is a fair to ask if the climb up and over the gigantic Wall of Worry led by European sovereign debt concerns but also including economic and political worries is complete.  Have “the shorts fully capitulated and has hesitant cash on the side-lines has finished entering the market?” Or, is the market’s advance still fresh with “the shorts YET to fully capitulate and with plentiful cash remaining on the sidelines?”

We remain steadfastly bullish and believe that the 2012 advance is still powerful and fresh.  A quick glance at the Russell’s monthly chart in Fig 2 is all we require to be convinced there is more upside and capitulation to come.  But analytically, we turn to 2011’s large retail and pension fund US equity market liquidations to argue that not even a small portion of the money that left equities in 2011 has returned to the market.  Further, anecdotally we don’t believe hedge funds have become overtly bullish.

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