INVESTORS BEWARE: THE MARKET WILL INFLICT MORE PAIN
This article also featured on Forbes
Today I'm astounded. Not by the price action of the past seven days. Not by the percentage losses I am seeing in some of the popular momentum plays I follow. But rather by the nonchalant, "this too will pass" attitude I am seeing from a wide variety of investors. The current attitude seems to be one that can't imagine things getting that much worse than they have already gotten. It's a mindset that sees a substantial bounce as being the probable course ahead.
Most of the investors I have spoken to seem to think that the S&P downgrade was a nonevent. The markets are overreacting is what I have heard more than anything else over the past couple of days. Perhaps the S&P downgrade was indeed a nonevent. The markets, on the other hand, are not overreacting. What the markets are doing is telling us that something is indeed brewing deep in the bowels of this erratic, violent and relentless beast. Whether or not the S&P downgrade has brought us a step closer to finding out what is bothering the market so much is yet to be determined. However, our bull has come down with a rather serious virus that may not be curable simply by the snapping of one's fingers.
I approach the markets with a very simple philosophy that has served me well throughout the years. The philosophy is that the financial markets hate me. They hate you too. In fact, they hate anybody who attempts to pick fruit from its bountiful tree.
The markets play on your emotions. The goal is to abuse your weaknesses as a functioning human being. The emotions of fear and greed are the first to be picked apart. Your logical mind is next. Your dependance and pride in your intellect also becomes a victim. The list goes on. The traits that make your friends hoist you on their shoulders and run around a field chanting your name while you wave your hands in the air and make funny faces, can become your undoing in the markets.
I bring this up because of the simple fact that investors are acting as if the stock market loves them so much at present that it has corrected some 15% over the past couple of weeks simply to provide them with a favorable entry point so that they can make money for a new kitchen, a red sports car or an expensive trip to an exotic locale. That's what it feels like to me. It feels like investors are confused enough here to think that the market actually loves them. It hates you.
It wouldn't come down 15% just to provide you with a fantastic entry point so that you can make 30% over the next few months in your favorite tech stock. The market is far to devious and conniving to allow such acts of gracious abundance to occur.
With that said, your job is to think of how the market will go about inflicting the greatest amount of pain in the most unexpected of ways. It can inflict pain by going up substantially when people are unprepared for a substantial rally. It can inflict pain by punishing investors who are long and refuse to give up by dropping to levels that few think are possible. According to everything I am seeing, a substantial drop over the coming months is not something that many investors are prepared for.
The bearish stance I have adopted is a dramatic change of sentiment as I have been bullish for sometime now. I have been compelled to take on this bearish stance as I believe that price action is often times wiser than any bullish rationalization, thought or scenario that even the most storied market participants can devise. This becomes all the more true when that price action is paired with a complete and total dissection of the interest rate, commodity and global stock markets. These are all confirmations that massive amounts of money are shifting rapidly in ways we haven't seen in sometime. The winds are shifting. The landscape is being altered beneath investor's feet.
We may continue bouncing up for the next few days or possibly a couple of weeks. A bounce above 1200 on the S&P seems to be a good point to raise cash or get short. The potential for further expressions of hate out of the global markets is at a point now where it shouldn't be ignored.
