Tuesday, June 1, 2010

Blood in the water?

Here is the cover of The Economist's latest issue. It shows a "Jaws"- like image of a shark's dorsal fin peeking above the water. This image screams "hidden danger" and the caption, in bold red letters, is "Fear Returns".

I think this image reflects the sudden return to strong bearish sentiment that has been induced by the U.S. stock market's 15% drop in May. It also reinforces the reluctance of the average investor to "get back in the water". So I think it is a strong positive portent of the market's future direction from current levels (Friday's S&P 500 close was 1089).

Along the same lines I want to bring to your attention the latest weekly sentiment survey of the American Association of Individual Investors. It shows 50% of those responding expressing bearish views about the near term direction of the market, the highest level in more than six months. It is unusual to see more than 50% bears in this survey since the AAII members tend to be generally bullish on stock prices.

All in all, I think the current market juncture is a buying opportunity for the aggressive contrarian trader. But since he already is carrying an above average stock market commitment from the 690 level in the S&P 500 no further action is required.


  1. I would say the contrarian view of in these markets is to sell and go short.

    Whatever be the noise in the market, the bulk of investor public is still happy and wearing rose tinted glasses. They seem to be content with their investments and are not pulling out en-masse from the markets.

    They still trust that their governments will some how get them out of the mess of massive debts.

    They still seem to complain when someone reminds them to control the consumption and save for future.

    I would say the herd is still on the long side and contrarian should be looking at opportunities to sell for long term.


  2. VS, in my opinion happen the next.

    At this stage fo the market you don´t need 99% of people with a negative view, but most of the people and in general term "escepticism".

    The 8th march mood is not gonna happen now, cause the market is not the same.

    Is true I detected some optimism between a few investors, but much more pesimism between the most of them. Also these days we read a lot of bad news, selling recomendations, panic for some moments and negative coments from readers in the online newspapers.

    ONe example this one: http://www.marketwatch.com/story/crash-is-dead-ahead-sell-get-liquid-now-2010-05-25

    Also, in these day you will read recomendations for sell from a lot of hedge fund managers, managers who the online newspapers take care to put them in the cover.

  3. Carl,
    When there is a negative news headline, you take it as contrarian to justify your bullish stance but when there is bullish news headline on the front cover, you say it is NOT contrarian...

  4. Carl, if I may contribute some rare(ish) data... please check adv/decl issues up/down vol. From Friday's close advance issues has never been this low in 18 years. Up volume has been this low on monthly basis only in 1998 (asian/mexican/russian/LTC) crises. These charts indicate we could be close to an inflection point. After such point, in 1998, markets moved 50% to the upside in 16 months. History rhymes... sometime.