Finally somebody who shares my positive outlook...
Don Hayes, chief investment officer, Hays Advisory Group Interview By SANDRA WARD
Barron's: You, a longtime bull, turned cautious in mid-October. What's your stance now?
Hays: We developed a matrix in 1987 based on investor psychology, monetary conditions and stock valuations that we use exclusively in determining allocations. This is what determines how much cash we have. We don't argue with it. Right now, for long-term growth it points to 100% equities, zero cash and zero bonds. That compares with Oct. 15, when investor psychology signaled we should raise cash in our portfolio to 8%. But we put it all back in a few weeks ago.
"Why would you invest in the U.S. under restrictive policies and a dumb Federal Reserve?"- Don Hays What gave you the green light?
Investor psychology had turned too negative and the market got very oversold.
How do you measure psychology?
You could see the nervousness and fear Friday, Nov. 9, in the CBOE's VIX, a measure of volatility. We also looked at what we call the Smart Money Index, which examines the last hour of cumulative trading in the Dow Jones Industrial Average, considered to be the "smart" money because there is no real news reported and it gives a clearer view of how investors are thinking, compared with the more emotional moves made in the first 30 minutes of trading in the day by "dumb money." On Nov. 9, the smart money was buying and the dumb money was not.
What about the action last Monday, when stocks plunged in the last hour?
Not to downplay the move, but focusing on the new low in the S&P 500 from its October peak doesn't tell the whole story. The internal numbers, as reflected by the number of stocks making 52-week lows, show a substantial number of stocks did not share the experience on the downside. For instance, on Aug. 16 on the NYSE, we had 1,125 stocks making new 52-week lows. Yet Monday, 717 of those 1,125 did not violate the prior low-water mark from August's panic decline. On the Nasdaq, there were 231 stocks making new 52-week lows, compared with 338 on Nov. 8 of this year.
We consider the Smart Money Index a good indicator, but it is not a primary indicator. The American Association of Individual Investors' Bullish and Bearish Survey is much better. The bullish sentiment had gotten very, very high on Oct. 15, when we raised cash, but as of Nov. 9, bullish sentiment had come down and bearish sentiment had moved up and the three-week average of bulls to bears showed more bears. Sentiment also entered a zone that historically has been a good time to do some buying.
What other sentiment indicators give you confidence at this point?
Insider-trading data collected by Scott Gambill of Emergent Financial. He tracks the five-day moving average of insider buys and sales on the Russell 3000 index. Any time this average has moved above 25% it has suggested some great buying opportunities. It happened in the selloff in February and March and it just happened again. It is up to 70%, and that is a very positive sign. Corporate insiders are buying at the highest rate of any time in the past four years, when the SEC started requiring timely disclosure of insider buys and sales. The missing link has been the OEX [options on the S&P 100] open-interest put/call ratio. OEX options are highly liquid, so people that want to do big trades use them and, again, it's a way of tracking the level of fear in the market. It hasn't yet provided confirmation, but it has started coming down.