Oct 09, 2009 @ 08:52 am
"The main purpose of the stock market is to make fools of as many men as possible." - Bernard Baruch
The market is set to make a move...a very big move.
And it could be in a direction that would surprise and prove very costly to a lot of investors.
The markets have been struggling for the past week. Yesterday's 200 point drop in the Dow was quick and widely anticipated. It's the strongest test the bulls have had in months. So far, they're not faring to well.
But as I watched the markets fall yesterday (normally at the Prosperity Dispatch, we try and avoid the day-to-day stuff) I couldn't help but wonder if it is a sign of reality setting in? Or is it just a healthy correction to suck in even more bulls into this rally?
As we've seen time and time again, no one knows the answer. But if we look at what's going on in the markets, we can get a good idea of what's likely to happen next. And a few indicators right now are showing the market's next big move may make a large and growing group of investors look like fools.
Are You Scared Yet?
The last few weeks have been tough on quite a few investors. Most investors are on edge. Take Dania Leon for example. She's a 41-year old Pasadena resident who has held out throughout the ups and downs of the past year. She's the "typical" investor. She recently told the Los Angeles Times:
"I'm scared, I'm scared, I'm scared. Why are we up, especially with unemployment as high as it is? I don't feel great because I worry that we could have a 500- or 600-point drop in a day and I won't be quick enough to pull out of it in time."
That's how most investors are feeling right now. But if we look at the markets, the case for something more extreme than most anyone is expecting could be just around the corner.
Expect the Unexpected
The bear's confidence is strong and the recent downturn is only strengthening that confidence. The bears' conviction has been strong for months though and the markets have just kept going up.
That's why, as contrarians, we should be looking at the "what ifs" that no one is expecting. Remember, the market has a tendency to do the exact opposite of what most market players are expecting. That's why, in the short-term, we could see the run-up...hold onto your hats...continue.
The amount of bearishness out there is still extreme.
A little over a week ago James Grant, a well-known and highly-respected perma-bear, officially turned bullish. In his Wall Street Journal article, From Bear to Bull, Grant made a case for why the market could sustain current levels and the economy could recover much faster than most folks expect.
But here's the thing. Grant was universally maligned. He has been the steady hand of the bears for years. And he has been a welcome ally during this rally. His proposal about a quick economic recovery was attacked from all sides. It was almost like the bears took it personally.
The near-universal vilification of Grant's "betrayal" is just anecdotal evidence of how much bearishness still remains. There's firmer evidence in the bears' conviction. And it's something that doesn't happen often.
Holding on Tight
Back when the evil "short sellers" (those who bet against stocks) were being attacked from all sides (it's almost too easy to attack someone who's making money when most others are losing it), we looked at the reasonable and value-added role they play in the market. Still though, the short sellers on Wall Street aren't a popular bunch when it comes to public opinion. But they can help show us where the market may be headed next.
Every couple of weeks the major exchanges publish "short interest" data - the total number of shares "sold short." This way you can see how big the bets are against the stock market as a whole.
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