Merrill Lynch’s Bob Farrell was the doyen of sentiment analysts. He famously suggested that ‘bear markets have three stages – sharp down, reflexive rebound, a drawn-out fundamental downtrend’.
So far we have certainly seen the ‘sharp down’ period, and the blog’s new Boom/Gloom Index© seems to have signalled the current ‘reflexive rebound‘, with July’s Index correctly indicating that market fundamentals and sentiment would continue to diverge:
• The former remained neutral, as shown in the round-up of company statements, and fellow-blogger John Richardson’s Asian review.
• But sentiment remained very positive, as the financial sector claimed to “look through” current fundamentals to a more positive future outlook.
However, August’s Index suggests they may now be starting to realign. And this is supported by the 26% decline in the Green Shoots reading.
So far, investors have been willing to assume that the current restocking process is indeed becoming a real recovery. But if Farrell’s analysis is correct, they may soon start to demand more evidence to support this belief. The clear risk is that this would then lead markets to enter his next phase of ‘drawn-out fundamental downturn’.