This Week's Message: Gloom is Good

In last Monday's post I wrote:

"Sometimes immediate conditions are such that the would-be buyers decide to sit on the sidelines for days, weeks, even months, waiting for things to shake out a bit -- and waiting for the average investor to panic."

Yes, a classic characteristic of a stock market bottom is that ultimate capitulation when the last holdout seller -- typically the individual investor -- succumbs to the pain, and the recency bias, and turns his/her shares over to bargain hunters who suffer not the affliction of believing that what's occurring today will occur forever.

While I'm not making the capitulation call (not making any call, actually), Bloomberg looks to be (the "pros" the article refers to are certain hedge funds"):

"Mom and Pop Finally Join Pros in Dumping Stocks Amid Market Rout

Main street and Wall Street are finally seeing eye to eye when it comes to stock investing.

After going all in on equities for most of the year, individual investors just bailed amid the October sell-off, raising cash at the fastest pace in three years, according to data from Charles Schwab Corp."

I will tell you this, however, the latest investor sentiment readings have become decidedly negative (supporting Schwab's data), which is definitely bullish!

Here are the results of last week's highly touted American Association of Individual Investors (AAII) sentiment survey:

Yep, when the average individual investor is this bearish, you and I should probably be bullish! Why? Well, I ask you, when are investors likely to have a surplus of cash on the sidelines; when they are resoundingly bullish, or bearish? Right! When folks are crazy bullish, they're all in (no cash). When they're bearish, they're holding cash. Now I ask you, is the market more likely to move higher when there is a dearth of cash on the sidelines (i.e., nothing to buy with), or when there's a surplus? 

What might happen when a little good news hits the airwaves -- say, huge retail sales over the holidays, or, critically at the moment, a trade truce between the U.S. and China? I.e., when investors' fear of losing suddenly becomes the fear of losing out.

The last time individual investor bearishness was this high was February 2016, which marked the market bottom of what had become the worst start to a year in history.

Now, for the icing on the negative sentiment cake, investment adviser sentiment (according to the also highly touted Investor Intelligence sentiment survey) is slipping into the relative gutter as well.

Here's from the source:   emphasis mine...

"The bulls dropped to 39.6%, after a tiny rebound to 42.9% a week ago. That is their low for this year and the fewest bulls since May 2016. That was as markets were starting their recovery from the markets last correction of at least 10%. Feb-16 began with the bulls at just 24.7% and that marked the end of the correction and about six months of basebuilding trading, including retests of lows. That was the last broad general buy signal. That history suggests the current bulls have further to drop, causing more advisors to raise cash. We also expect increased fear. The current bull count is down sharply from 61.8% at the end of Sep. That was their high since 66.7% late Jan-18. Both were clear warnings! 

Yes, that's really bullish stuff. However, before you go popping any corks, note the following from the above paragraph:

....that marked the end of the correction and about six months of basebuilding trading, including retests of lows.

My point being that while, from a purely sentiment standpoint, it looks as though a bottom may be near, it doesn't mean that things can't get a bit worse (much worse if the trade dispute continues) before they get better, or that when the market does bottom we go screaming back to new all time highs in a matter of days, or weeks. Yes, successful long-term investing often requires great patience.

Lastly: The following from Bloomberg this weekend is on par with our present macro view, and points to yet another statistic that lines up with the early 2016 correction low:

It doesn’t take a degree in technical analysis to be concerned. More than $3 trillion has been lopped from U.S. equity values since late September, a sell-off that has driven the S&P 500 down 10 percent and tech stocks well past the threshold for a correction.

To see how violent it’s been, look at the number of stocks where this year’s once-robust price momentum has come asunder -- those trading below their 200-day average. Support is wearing thin, with just 37 percent of S&P 500 companies exceeding their long-term moving mean.

At the same time, the chart is an illustration of how it can be a mistake to take markets too seriously when looking for clues about the economy. While the preponderance of stalled stocks is high by historical standards, it does have a recent precedent: 2016. No recession followed that signal.

None is coming now, either, according to the people who are paid to anticipate such things. Odds the U.S. will fall into a recession in the next year stands at 15 percent, according to Bloomberg’s U.S. Recession Probability Forecast index. While they see the economy losing a bit of speed next year and in 2020, the median estimate of economists calls for 2.6 percent economic growth in the next 12 months.

However, I emphasize again, if the U.S./China trade conflict becomes a protracted affair these hopeful scenarios will likely come to naught.