There are so many bearish calls and so much negative sentiment that now is the time to buy stocks, some analysts and strategists have advised. But Philippe Gijsels, the head of research at BNP Paribas Fortis Global Markets, thinks the opposite is true.
Many investors missed the 2009 rally because they could not see a reason to buy, and those trying to buy the market now risk the same fate in the opposite direction, Gijsels told CNBC.com.
"There are certainly more bears than a couple of months ago," he said in a telephone interview. "However, we should also not forget that the rally from the March lows last year was the most hated and non-believed rally in history."
"At the end of 2008 and the beginning of 2009 we started talking about positioning for an explosive rally," Gijsels said. "As the rally started in March, there were few people who got on board. Fund managers were underweight equities and were forced to play catch-up as they tried to buy the dip that never came."
The only time we saw too many bulls during the 2009 rally was when it came to an end in April of this year, according to Gijsels.
"The market then finally saw a capitulation to the upside at the end of April 2010 when we saw the longest winning streak since 1986 with minimal volatility," he said
"Algorithmic trading certainly played an important role," Gijsels explained. "People kept buying the momentum to the upside with a tight stop. When the inevitable correction hit, stop after stop was triggered and we got a mini crash."
He said that the 20 trading days before the drop were "probably the only time during the entire rally from the March lows when we saw a lot and probably too many bulls"
This Is a Bear Market
Gijsels remains bearish and sees a number of reasons to stick to his guns.
"I see quite a lot of market participants who talk about economic figures and corporate figures still being strong, which are, to a large extent, rational arguments," he said.
"The only problem with these figures is that they give a rear view mirror perspective. They give us a valuable inside about the past, but fail to answer the question how much the economies in the US and even more so in Europe will slow down in the second half of the year and going into 2011," Gijsels said.
What of those who say valuations are cheap? He has less sympathy for this argument.
"If we compare the price earnings valuations with the recent past, markets look attractive. However, when we look at stock market history, we see that valuations follow a regime switching pattern. A P/E of 15 can be the average for 15 years and it can drop to an average 8 for the next 15 years," he said.
"Unfortunately you never know in what regime you are investing. And if people start to use bond yield/earnings yield arguments as an argument to buy this market, I invite them to look at this indicator in Japan over the last 20 years."
When investors start hating equities with a vengeance it will be time to start looking for bottoms but that is not yet the case, according to Gijsels.
"The chances are real that this rally is just another bounce in a larger downward move. Remember that we typically get the strongest up days in down markets. Thursday's action was a good example," he said.
We could see further gains of this nature over the coming days but Gijsels predicted that it would be difficult to break through 1,100 on the S&P 500.
"The damage to the indices and many individual charts is quite substantial. I also do not see a lot of leadership, only bounces in stocks and sectors that have been taken down the most. A new bull market needs new leadership and that is for the moment nowhere to be found," he said.