By: Chris Rowe — January 8, 2019
Why does the whole world seem to think now is the time to get bearish and expect lower stock prices?
On September 11th, 2018, my article "Watch for This Stock Market Sell Signal" gave you several extremely compelling reasons why the market would sell off dramatically. It also gave you instructions on how to hedge your portfolio.
But the craziest part?
I had written several articles before that and shortly after that explaining the same thing.
And NOW investors are being told to get bearish?
Virtually every time the stock market has been in it's current technical situation for the last three decades, it has rallied by about 20%+. And many of those times, a major bull market followed. I explained this to you, in detail, in last week's article.
If anyone would like to sell me and my friends your stock down here at these levels, please feel free. I have my fishing net out, waiting.
Here's, yet, another reason why...
You're looking at about 20 years of data showing the stock market on the top half of the chart and an "advisors sentiment" reading on the lower half.
Before getting into details, all you really need to do is follow the blue arrows from the times this reading moved below the zero-line.
They point to a couple of bear market bottoms, like in July and October 2002, and again in late 2015 and early 2016 (yes - we experienced, what I refer to as a "bear market" in 2015).
One points to a major low, within a bear market, after the stock market reopened after the 9/11 attacks.
And three of them point to major lows, within a bull market, like May 2006, after the May 2010 "flash-crash" and again, in October 2011, after the government shut-down and debit ceiling issues.
I remember all of those time frames and people were feeling the same way they feel today.
But I can't move forward, in this article, without acknowledging that these sentiment readings declined below the zero-line - A LOT - in 2008 when the global financial market was melting down.
Today's situation is nothing like that. Not even close. Not from a economic standpoint and not from a technical standpoint.
Believe me if it were like 2008, the writing would be on the wall, like it was in 2006, 2007 and 2008.
After banking profits throughout 2006 and 2007, I was shouting from rooftops throughout 2008 that we were in bear mode, recommending almost exclusively bearish positions. This is not going to become a 2008-like stock market.
Do I know that it's going to recover and become a new bull market directly off of the current lows?
I have no idea at this point but that's just the reality of how the stock market works. Marketing firms - er - I mean brokerage firms, newsletter firms and the financial media - will try to paint an easier picture for you to digest. They'll give you a 2019 prediction and they'll make a case for why the S&P 500 index will reach a very specific price level.
Shame on them.
All we need to know at this point is the market is, on an intermediate-term basis, oversold already. We can figure out the long-term direction once we have more evidence, over the coming months.
In the meantime, the above data shows an "overcrowded bearish trade". Just from bearish investors exiting their bearish (short) positions (by buying back their short stock), the stock market is likely to make huge intermediate-term gains from here.
And before anyone asks the question, the answer is "NO... I'm not calling the exact bottom." The financial media wants you to think the way to make money is to be able to call bottoms and tops. The two most important parts of investing are risk management (hedging, position sizing, etc.) and allocation (what you'll invest in), as opposed to market timing.
The details of the chart above can be seen, below.
The first chart I posted had one black line in the lower half. That line represents the difference (spread) between the red and blue lines (bulls and bears), above.
If you haven't seen this chart, I'll explain...
Investors Intelligence polls over 100 independent investment advisors every week, asking if they are bullish, bearish or looking for a correction. The results are what you see, above.
It's a contrary indicator that suggests that when too many people share the same sentiment, there's likely going to be a reversal soon.
Remember, in the original chart, how the black line moved below the zero-line? That's what happens when the red and blue lines cross.
That is, when there are more bears than bulls.
This is hardly ever the case, but when it's true, it's almost always a good time to be a long-term buyer or an intermediate-term buyer.
If you don't want to commit to a long-term stance, right now, then be an intermediate-term buyer for a trade that lasts a few weeks to a few months. That's what "intermediate-term" means.
I know it's tough.
But let's try to stay sober here and not sell at the worst time possible.
Instead, let's hunt for strong stocks in strong groups and hold them. At least for a little while.
Founder, True Market Insiders