One of the most remarkable and persistent features of the current bull market is a willingness – nay, a compulsion – on the part of investors to turn negative at the drop of a hat.
This is entirely to be expected given the fact that this generation has seen two back-to-back peak-to-trough S&P 500 declines of 50% since the beginning of the millennium.
This calls to mind Mark Twain’s proverbial cat – whom, upon sitting on a hot stove, would not do so again – nor would he sit on a cold stove either.
“Once bitten, twice shy” would also be applicable here.
My good friend Joe Fahmy, who manages money professionally at Zor Capital, details this jumpy, twitchy phenomenon perfectly in his latest Market Memo to clients…
For the past 2-3 years, a similar pattern has repeated itself in the financial markets. The major indexes start to break down towards their 50-day moving averages, the overall market starts to weaken (usually sparked by a geopolitical event), and then sentiment turns EXTREMELY BEARISH in a short period of time. It happened again over the past 2 weeks. Here are 3 examples:
1) The CNN Fear/Greed Index (measured from 0-100) moved from 95 to 5 in just two weeks! It closed at 12 this week. This shows an extreme shift towards fear in the market.
2) The CBOE Equity Only Put-to-Call Ratio spiked over 1.0 on Friday 8/1/14. It rarely shows a reading this high, and when it does, the averages are usually down about -1.75% for the day. On Friday 8/1, the market was only down -0.29%. In other words, there was a high level of fear when the overall markets were not down much.
3) The NAAIM survey of active investment managers dropped from over 80 to 50, its lowest reading since October 2013. This survey tends to be a great contrarian indicator and usually correlates with near-term market lows.
Joe explains that it is this very “one foot out the door” behavior that has actually been keeping a bid under the market, as the weak hands are forced back in as they are made even more uncomfortable by the market rebounding without them.
So yes, the bulls are back. But no, these are not the sort of ebullient bulls of bull markets past. These are some of the most non-committal, skeptical bulls we’ve ever seen.