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when sell means buy

Scott Maxwell - Thursday, September 05, 2013

 

‘Yer jest plain contrary’. So I’ve been told a time or two. And imagine, I thought it was a compliment! I’ve learned it’s perhaps not-so-good when your wife tells you this, but it an entirely different story when you apply this contrary behavior and outlook to thinking about capital markets.

 

Contrary indicators on Wall Street aren’t about stubborn behavior it turns out. Rather, contrarians are those who run opposite the herd. When everyone is convinced that stocks are the greatest things since sliced bread the market may just be in for a downturn. Similarly, when folks are selling stocks as fast as they can just may be the time when bargains abound. Of course, most of the time markets are somewhere in between the extremes of despair and euphoria. Nonetheless getting a handle on the level of bullish or bearish sentiment can be helpful, especially when combined with valuation analysis and other indicators of  asset class desirability.

BofA/Merrill Lynch recently published a chart showing where we are in the eternal cycle of the Bull and Bear. The reading of 52.9 in August still puts us in bearish territory as far as sentiment is concerned. That’s often a good thing as can be seen in the chart above. MarketWatch describes the current trend and a little more of the history in their recent post.  

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