Markets Rarely Fall When People Expect Them To
Geez, a couple of bad days for crazily-priced momentum stocks and traders have turned extremely negative. Many pundits are calling for another big stock market crash.
Should you be worried? Let’s review a few indicators that have been useful over the years.
NYSE short interest is now at elevated levels seen only five other times since the start of 2009.
History says that is a really good thing.
People typically tend to feel emboldened to sell short only after markets have corrected. Note the ultra high ‘short interest’ readings circled on the lower chart shown below.
Within just weeks to months after all five of those most recent extreme readings, the S&P 500 was significantly higher. The present day bearishness is a bit surprising as it follows only a flattish first quarter, rather than a scary sell-off. Regardless of the cause, today's message is a positive one.
Many fund managers and individuals who missed the great run since the ‘Fiscal Cliff’ political garbage, during November-December 2012, may be wistfully hoping to catch up via a 2008-style major sell-off. They then expect to swoop in, picking up shares at heavily discounted quotations.
That’s not how markets operate, though. The indices usually do what will frustrate the most people.
The least expected scenario right now appears to be a continuation of the five-year bull market. The true contrarian play is to go against the currently very nervous crowd... by staying fully invested.
The average stock has been doing just fine. Research service SmarTrend noted that uptrends far outpaced downtrends over each of the most recent three weeks.
The Equity-Only Put-Call Ratio is another excellent contrary indicator. Traders tend to seek ‘put protection’ at times when they should be bullish. This signal, too, is telling us that it remains safe to be invested.
In reality, nobody can predict exactly when stocks will pull back or advance. What we can know are the actual historical results of being in equities versus other asset major classes. The final results from 1950 right through year-end 2013 are now available.
Seeing the facts might be all you need to know about where your long-term money should be.
Disclosure: Heavy in stocks, I own no bonds