Why So Many Stock Market Bears After Such a Small Decline?
For Jean-Paul Sartre, hell was other people. For contrarian investors, hell is other people with the same point of view. Bullish contrarians feel bad when too many other investors feel good, and vice versa.
The stock market is down about 10 percent from its recovery high and still up more than 60 percent from the low reached in March 2009. You would expect investors to take such a small decline in stride, but they seem positively anguished by it.
Investors were net sellers of nearly $15 billion in domestic equity mutual funds in May, according to Morningstar Inc. That more than wiped out the $6 billion inflow during the first four months of the year, the fund research firm said, and marked the biggest monthly exodus since the very same March 2009 when stocks bottomed. Other signs of investor fear:
The "panic/euphoria" indicator tracked by Tobias Levkovich, chief U.S. equity strategist for Citigroup (C), has dipped solidly into panic territory. Compiled from such measures as the proportion of shares sold short, the level of margin debt and the ratio of trading volume in call options to put options, the indicator likewise has not been this low since the pit of the bear market last year. The deterioration has been sudden; just a month ago, when stocks were about 6 percent higher, Levkovich accurately warned that investors remained too complacent.
The proportion of bears in the latest Investors Intelligence survey of investment newsletter editors rose to 31.9 percent, more than at any point since last summer, although it remains somewhat below the 50 percent or so that was common during the worst of the bear market.
Robert Prechter, president of Elliott Wave International and a renowned long-term stock market bear, was featured this month in a Businessweek cover story about bearish market forecasters. He was also on CNBC's "Closing Bell" program June 10 with Maria Bartiromo. Prechter, whose views were featured here and here, reiterated his bearish stance to Bartiromo but also said that "the market could certainly bounce for a while."
What's important is not what he said but the fact that the doyenne of CNBC interviewed him on prime time (for Wall Street) and on a day when the market soared more than 2 percent. If investors were still gripped by the complacency that was rampant at the top and that foretold the sell-off, Prechter wouldn't be in demand by the financial media, except maybe by "Against the Grain," which highlighted his views and analytical approach here and here. The fact that he's become the flavor of the month means that this probably isn't the month to bet on a big decline.
