Guest Post: Breaking Down The Bullish Argument

Tyler Durden's picture

Submitted by Tony Pallotta of MacroStory.com

Breaking Down The Bullish Argument

Equity bulls have found solace in the abnormally high bearish sentiment readings. Seems everyone wants to be considered a contrarian. Rather than follow the herd these free thinkers venture out into the cold dark tundra alone and unafraid. They proclaim to the world "huge bearish sentiment to propel the stock market rally."

The great omen of Wall Street is to fade the herd and where better to find their direction than a simple sentiment survey. When it says go east they go west. When it says to ying, they yang. The American Association of Individual Investors declares this survey to be the true contrarian indicator.

"History shows us that more times than not the market will go against the majority. Extremely bullish levels of sentiment often come after strong market run-ups when investors are fully invested in the market. Even if they are bullish about the future, they have limited additional resources to invest. By following market sentiment indicators, you may be able to pick out market tops and bottoms. In other words, investor sentiment may be used as a contrarian indicator for the overall market."

Who to argue with history and years of precedence. Surely a simple analysis of the data will substantiate this modern day folklore? Or will it?

AAII Percent Bearish VS SPX

The historical analysis below shows something odd happening in late 2008? Investors went from contrarian indicators to actual leading indicators. Don't believe it? Look at the data and decide for yourself.

Something that correlated poorly although inversely now as of 2008 correlates very tight and no longer contrarian. One can speculate why the change but one cannot deny how rising bearish sentiment can no longer be considered contrarian.


Go Long Stocks At High Bearish Levels

The data also refutes this adage. Just because bearish sentiment is at high levels does not mean you go long. Just look at the data below. If you bought because bearish readings were close to current levels of 45% you would have suffered some nasty selloffs.

Did Wall Street Mislead Us

Don't completely fret if it appears Wall Street folklore is no longer. Another folklore will come to your aid, "the trend is your friend." Yes the trend. Not the absolute value as a line in the sand but rather the trend of those with bearish views. If they are rising stay short. If they are following go long. But judge for yourself from the chart below.

So What's A Bull To Do

Dare I say these words but you may want to consider moving to cash or if really feeling like living on the edge go short. Here is what those "contrarian" investors are telling the AAII each week they are surveyed.

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meatball's picture

If the building is on fire and everyone is running out, it must be time to look cool, be a contrarian and run in...oh wait...

SilverIsKing's picture

You gotta make sure you're wearing cool shades and new Nikes when you do that. Fedora is totally optional.

DavidC's picture

On the other hand, if everyone is sitting at their desks and you can hear the crackling of flames, do you remain at your desk simply because they do?

DavidC

UP Forester's picture

CNBS's new "Non-Recessionary Indicators" are bullish!

rocker's picture

 So are Bloomberg's Betty Lou. When the jobs numbers came out she was so kiddy. She could not stop saying,

 "So this means we are not going into a recession".  Matt seems equally jolly.

Cramer says no contagion, Don Luskin wants to buy everything U.S.   Geezzzzz. This has to be all Bullish.

We need confirmation.  Where's Robo?   LOL   

Side Note: Not with my money.  No way in hell.  The computers can flip the switch at any time they want.

DormRoom's picture

same thing in Sept 08; a rally followed by an epic plunge.  daytraders react to charts and level 2.  But economic forces are churning to a reality few are prepared for. Debt:GDP for most developed nations are unsustainable, more so if we enter a recession, and there's been huge misallocation of capital over the last decade.

web 2.0 asset bubble still hasn't popped.

Daytraders will be caught once again in the maelstrom, believing they can forecast, and outrun the future with charts & level 2.

Spitzer's picture

Maybe but that is all short term noise.

The real losers, in the end will not be investors stuck in equities. As history has shown, it will be the investors stuck in bonds that will lose everything.

http://freegoldobserver.blogspot.com/

DormRoom's picture

debt:tax revenue provides a better metric.

SilverIsKing's picture

Nothing better about it...pun intended.

Atomizer's picture

But.. but as soon as GTFO in 2012 passes his Jobs Bill, retail traders will be able to make money three fold. Unfortunately, the government will increase your IRS tax base requirements. Hehehehee. You need to spread your wealth to the needy.

FYI

 Nigel Farage: Greece under Commission-ECB-IMF Dictatorship

 Just remember, #57 is not the steak sauce you seek to enjoy your meal. #57 is the meal that you would send back to the kitchen.

Cursive's picture

Thanks for this story.  The contrarian indicator bit is bullshit.  Just be careful of big bounces when the bears start covering.

Newsboy's picture

Reality check.

What is the reality in the global banking, political and economic sectors?

Chartology only applies most of the time, but not at times of massive systemic instability.

Than (now), you must be prudent.

baby_BLYTHE's picture

Like a earlier ZH article pointed out, the FED wants you to BEG for more QE. The market is and has been in a holding patter as of recent. It is reminsiant of 2008 only because many fear COLLAPSE in a Euro default or China hardlanding, the latter being which I personally will the catalyst for the massive long overdue double-dip and or rampant inflationary liquidity injection by the FED. 

baby_BLYTHE's picture

great movie. Filiming was done only a few blocks from where I work now. They don't make comdies like it anymore... 

Amish Hacker's picture

We're in a Lake Wobegon market, where everyone can be a contrarian and returns are all above average.

Your Creator's picture

gold is ready to go.  Which way i'm not tellin'.

Howard's picture

I believe we are going to see things deteriorate further in the next couple months and the dollar rally. When things get really bad the Fed will drastically expand it's balance sheet, then everything will rally. (except the dollar that is)

zorba THE GREEK's picture

After careful consideration of all the data, Zorba is now prepared to predict

with 100% accuracy what the future holds. Zorba has narrowed the outcome

down to three, and only three, possible outcomes:

1. Things are going to get better

2. Things are going to get worse

3. Things are going to stay the same

Plan accordingly. 

bIlluminati's picture

Zorba: Is that a long-term prediction, or short-term only?

YesWeKahn's picture

The bottoming process has two steps

1) VIX need to reach panic high, right now it is simply waving around 40, it needs to go much higher

2) Once panic sets in, VIX will drop hard, but equities will not follow yet, they may even break new low. This is when everyone wants to sell, the new bull market is born.

Mark4124's picture

Looks like a pretty perfect inverse lagged correlation in chart #1 to me. If anything his data seems to verify that very point he is trying to refute.

The4thStooge's picture

Then by all means, go long!

topcallingtroll's picture

Why thank you!

Dont mind if I do.

MacroStory's picture

You know modern science can correct vision problems. Granted Lasik is expensive but glasses are still relatively cheap. I suggest a visit to the eye Dr. first thing Monday. You must be joking right.

Fazzie's picture

Im such a contrairian, I look like part of the herd to the half-assed contrairians. Kinda like Bob Dylan with the electric guitar thing.

Nice article, I too have noticed a lot of conventional, tired wall street pearls of wisdom become at least temporarily eclipsed by the bizarro world inversion factor that has infected all the markets post crash.

 One reason I dont see the big contratrend "wall of worry" rally that is currently in favor that ultimately fails is that a simple look at the charts at how the crash played out with all the quant fund blowups just a few years back will put the fear into the bulls.

 Why should the smart money move billions into equities just to stumble over each other to sell them in a couple months.Try selling huge blocks of amzn during a free-fall just like in 08?

Why would the train back up just to let late shorts aboard?

 Nope, I think the crash is actually in progress, plunges, bear flags and more plunges coming soon. Dip buyers have been having their asses handed to them since July and they will keep thinking the next dip is even a better buy all the way down.

 

RideTheWave's picture

I think you trading perma-bears will be wrong from a trading perspective over the next 6 to 12 months. Notice I said trading as I remain a perma-bear on the macro side.

Most of you are betting against the "white swan" Mr. Bernanke. Furthermore, I think that Greece won't default and that if even if it did, the market would rally on the clarity vs. the uncertainty.

Remember that bear markets (and this is still a secular bear market) make it hard for bulls and bears to make coin. While I truly try to avoid front running the tape, my gut is burning with clarity about what I think will f*ck the most people.

It will rally. And it will rally hard. Surpassing the 2010 highs and then some when no one could ever see it coming......and that is just my intution talking....it has served me mighty well in the past....

RideTheWave's picture

Additionally a grand "final" bubble usually precedes weimar style hyperinflation....George Soros told you where the Bildebergers would be parkign their money in the "ultimate" bubble....hint...its shiny and yellow and it has a manic step brother who is white and shiny......

jeff montanye's picture

how do bear markets make it hard for bears to make money?  they are shorter in time and sharper in amplitude than bull markets.  especially at low or no dividend yields a short sale is less expensive than at higher yields (nearer bear market bottoms).  not to mention all the (beaten down?) fancy etfs now available.  end of credit cycle deflationary depressions including a two plus year (bear market?) rally of considerable size, now seeming to fade, may not be a bad environment for a patient bear.  one can usefully claim to have killed osama bin laden only once, right?

maddogs's picture

Probably should be ready for the burp then... since greece will take well over 150 Bill to keep uot of defaut short term, maybe another 100 bill longer. Goldman sold a lot of garbage for them.

Anonymouse's picture

The indicators changed because the rules changed.  The market is no longer ruled by fundamentals but by the Fed.  Since they can move the market at will, you might as well sit on the sidelines

handlingserpents's picture

14.10.11

[DX]@(5513-5632)

[EURUSD]@1.3681,  (S=>10.10-11.10,L=>12.10-14.10)

11.11.11

[SPX]@(1204-1234]

handlingserpents.wordpress

topcallingtroll's picture

Honestly this looks like a terrible time to go long the market in general so I did.

That has always worked out for me.

Going long when it looked like a great time has cost me money.

But who the phuck knows this time?

Cost average into ewz this next five years. You will be glad u did.

Johnk's picture

Just an observation, as I can be as bearish as the next guy, but the Stock Bears seem very, very, very confident lately.   Kinda like the bulls in March 2000.

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