Chicken Little is back to tell us that the market is way overvalued and due for a decline. After all, it’s been more than two years since there was a 10% correction in the SPX 500 or Dow Jones Industrials (according to the Stock Traders Almanac). Hedge fund managers are tossing out warnings, analysts are preparing for the worst, and the bearish crowd is still barking about an impending crash.
Meanwhile, the indices are at all time highs, or close to it.
If you’ve been on the sidelines listening to these fables, you’ve missed out. Even worse, if you pulled up some bearish plays (on the indices), then you’ve probably been beaten to a pulp repeatedly.
But what has the market really been telling us?
I have been saying for years that following the noise outside the markets will get you in trouble. The true signs of what is really happening will come from the markets, not from some analyst or fund manager on CNBC or Bloomberg who is most likely there to talk about their book anyway.
We don’t need to be twisted around by such flawed logic. Do we really need to hear that the sky is falling? These predictions are often loud and frequent, but like a broken clock, are only right twice a day. If/when they are right, the market will tell us, and it will leave plenty of clues.
As far as I can tell, the trend is still up, and until that changes (heavy distribution lasting for several days), then the trade is still on.
We just came off one of the best Octobers in history. Indices were up 3% in what was supposed to be the scariest month of them all. Did the markets tell us the market would rise? If we looked at how September closed out and assessed where things were at, the answer is yes. I know hindsight is 20/20, but frankly, the sentiment a month ago was sour, bearish, and defensive. While September was also higher, it seemed the move was hated by the bears, who fought back even as the markets moved higher and higher. They presented a wall of worry, and for what?
Today we have a similar picture, but some of the key sentiment indicators are flashing a caution sign, only if to be on the lookout for a sharp but short-lived correction. Volatility is still low (under 15%), which is not a problem until it is, and investment/trading surveys are becoming more bullish with emboldened buyers (which is a great contrarian indicator).
According to my good friend Ryan Detrick (@ryandetrick) of Schaeffer’s, the last two months of the year have been extremely powerful after a good September/October. The stats are here; he put them up on CNBC Friday. Ryan is as good as they get and rarely gets it wrong. He’s been spot on all year long – so why fight the market?