Stocktake

One person expecting a bear market is Marc “Dr Doom” Faber, who last week warned that the S&P 500 was facing a 30 per cent drop.

Faber famously advised investors to go to cash before the 1987 market crash.

Thing is, he’s also called for countless other crashes that never happened. Last August, he said US stocks would end the year “maybe 20 per cent [lower], maybe more”. In October 2012, he said major indices faced a 20 per cent fall. In August 2012, he said there was a 100 per cent chance of a global recession. In April 2012, he said: “We may easily have a correction of 10 to 20 per cent here.” In February 2012, he advised investors to “just wait here a little bit because we don’t know how bad the correction will look”.

Over the last two years, US stocks have risen 50 per cent.

Eventually, he will be right – bear markets are inevitable. Timing them, however, is another matter altogether.

Waiting for that elusive correction

With the Dow Jones index above 17,000 for the first time ever, and it being more than 1,000 days since a 10 per cent decline, are stocks increasingly vulnerable to a correction?

These round-number milestones spook certain investors but they shouldn’t. Yes, 1,000 days is a long time – the last correction occurred in October 2011, making it the fifth-longest streak since 1928, and more than twice as long as the average correction-free span. However, stocks went seven years without correcting between 1990 and 1997.

Additionally, the current run is something of a technicality, given US indices fell 9.9 per cent in 2012.

Similarly, crossing 17,000 is no more a cause for concern than was last November’s breaching of 16,000, or the ascent above 15,000 in May 2013, or the climb above 14,000 in February 2013.

If anything, it augurs well for near-term returns – since 1999, first-time breaches of millennial levels were followed with median three-month returns of 4.04 per cent, says Schaeffer’s Investment Research, double that of other quarterly periods.

US indices are among the world’s priciest, so there is a strong argument for rotating into cheaper markets, but the notion stocks “must” soon fall is superficial in the extreme.

Winning Woodford defensive

Renowned British fund manager Neil Woodford is also cautious. He's not pretending to know when markets will turn, but expects global indices to face a "tricky" time over the next five years and is loading up on defensive stocks.

Woodford, who announced last year he was leaving Invesco after a superb 25-year run – a £1,000 investment in his main fund would have compounded to £23,000, compared to £10,000 for the UK market – last week revealed the top-10 names in his new fund. His two biggest holdings are pharmaceutical stocks, AstraZeneca and GlaxoSmithKline, while another drug stock, Swiss firm Roche, also features. So do three tobacco stocks: British American Tobacco, Imperial Tobacco and Reynolds American.

Woodford has long favoured both sectors, and is especially keen on them today, saying they are “resilient to falling demand, have strong balance sheets and attractive valuations”. There is no guarantee Woodford can continue to outperform, but investors are optimistic.

His new fund has already raised £1.6 billion, a record amount for a new UK fund.

Short-selling at eight-year low

Despite all the hand-wringing over elevated valuations, investors are unwilling to bet on market declines, with short-selling hitting eight-year lows.

Markit data compiled for the Financial Times last week showed just 2 per cent of S&P 500 shares have been borrowed by short sellers, who make money when markets fall. That’s close to the lowest level since Markit began tracking the data in 2006.

Short interest in the Euro Stoxx 600 also hovers around 2 per cent, while just 1 per cent of UK shares are being used for short purposes.

Shorts tend to be skilled traders who see trouble coming before others do. That was the case in 2007, when US short interest hit a high of 5.5 per cent.

There’s no shortage of investors who see stocks as overvalued, but data suggests even bearish investors believe it’s too early to bet against the ongoing bull market.

Nearyesque goings-on in Spain

Talking of short sellers, kudos to US firm Gotham City Research, whose damning report into Spanish wifi firm Gowex prompted chief executive Jenaro García to confess to fraud.

It's a pity Spain's market regulator, the CNMV, was so blasé – its response was to query whether Gotham's report represented "possible abuse of the market".

Following the Gowex confession, Spain’s economy minister said the fraud was a “singular case”. How does he know? Did the regulator tell him?

It’s all a bit Nearyesque.