Jun

4

 It is very sad how the public continues to lean the wrong way and lose more than they have any right to. Even the big trendists who only look at charts had no right to miss the upward drift of the past few years.

How naive does one have to be to invest money with the trend followers who managed somehow actually to miss the "trend" and claim to the naïve public that there was no trend to follow?

The doomsayers keep coming back with the most unscientific and naïve reasons to stay bearish. What is more heartbreaking is that all their reasons are in fact quite bullish if they took a little time to study and analyze them.

Some reasons to be bearish are:

  1. Stock buybacks: With $600 billion in cash, S&P 500 companies are buying back stocks. For the sixth quarter in row share buybacks have exceeded $100 billion. This must be very bearish indeed since it means that these companies are depleted of any expansive ideas. In reality, stock buybacks are very bullish, as Vic and Laurel have shown. It is also an indicator that these companies believe that their shares are undervalued. Companies with buybacks outperformed over the next six months and one-year intervals.
  2. M&A activities will exceed $1 trillion this year. This is the third year in a row. Almost a quarter of this is done for cash. This must also be very bearish indeed according to the doomsayers. Again, these companies must have nothing better to do with the cash than acquiring other companies. Yes, the doomsayers believe that pumping back liquidity into the market to the tune of $250 billion annually and taking float out of the market is bearish. They believe that mergers are not an indication that these companies perceive the market as good value.
  3. The equity shrink that is taking place due to all the M&A activities must be very bearish indeed since it will leave the investor with fewer choices. Now that more money will be chasing less, stock supply could indeed be bullish-economics 101.
  4. Short positions are at all time highs. It is very bearish, as you all know since the short-sellers are the more sophisticated bunch and they are very capable of predicting the market turns. These short-sellers will have to eventually cover their shorts in the face of the ever-rising markets to avoid total bankruptcy, which will add fuel to the fire and is indeed very bullish.
  5. The most recent bearish reason is the Shanghai stock market that keeps going down. You have to admit that this is very bearish indeed. It will eventually spill over to the US and cause an economic collapse like never before. The laws of substitution dictate that the liquidity fleeing China will be looking for a safe haven in the US markets and can indeed fuel the upward drift even further specially given that the S&P, even with its recent advance under-performing the other world markets, and indeed representing great value at these levels.

As long as the public believes these reasons to be bearish and lets the pundits take their eyes off the actual supply and demand curves, there is no reason to fear that the public will get wise to the facts of speculation and life. This is indeed the most bullish time in history.

Riz Din replies:

The professional pessimists find reasons not to invest when prices are falling (they could go lower yet) and when prices are rising (markets are overvalued and a correction is imminent). By playing to the natural risk-averse mindset of the person on the street, they guarantee an audience. Maybe it is in the public's nature never to get wise.

I have no view on timing market entries and exits at current levels, but in the UK the most bullish time to invest was a few years ago when the FTSE was trading well below 4000 and the newspapers were reporting the death of the stock market. I am thirty years old and expect similar anti-equity sentiment to return at least once in my lifetime.

Alex Forshaw adds:

Well, at least you're seeing reason on China/Shanghai. Much more measured to foreordain a US bull market than a worldwide bull market.


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  1. nik on January 9, 2017 4:43 pm

    I was looking a couple of years back into the past on your page to identify a sentiment indicators which may help to predict the next top. It’s really astonishing to me, how positive all the contributors have been, even before the top 2007. I’m aware of the drift and the fact, that there is no short seller (or technical analyst or a Mr. Doom) who is successful in the long term, but what are the best indicators in the opinion of the contributors to identify a (local) top?

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