Wednesday, May 25, 2016

Why is everyone so bearish on the stock market?

First off, let me toot my own horn. The options trade I recommended last week worked out beautifully. SPY opened on Monday at 205.50. So if you wrote the expiring 205 straddle, you made about two points. If you just bought the market, you made about a point and a half.

Second, I want to point to an article by Richard Bernstein Still no one Wants to Play. It expresses my sentiments exactly. I know a lot of professional traders, and I real a lot more. These folks are  overwhelmingly frightened and mostly bearish. Why? I can think of three reasons.

First (as Bernstein says), many people look at history and think that the economic/market cycle is well advanced. What they miss here is that this cycle has played out very slowly, There are good reasons for this, and they have to do with the very slow return of confidence. The upshot is that we are nowhere near the end of the cycle. If I had a dime for every well known prognosticator who forecasted a recession (or claimed that we were in one now)....

Second, almost all the pros now trading suffered a near-death experience in 2008, and that has remained firmly in their reptilian brain. Like I said in a much earlier post: 2008 was the Gen X version of what inflation was to the boomers. It will keep them frightened till they retire or die or both. Just like the fear of inflation led many in my generation to miss the greatest bull market in bonds ever, they will miss out on risk assets.

Finally, and directly relevant to commodities, is China and the far east. No I don't mean that they are over producing and destroying our jobs. They are, but they are also oversaving. This savings has to go somewhere, and a lot of it is leaving China (with good reason). So there is a very large inflow into mostly low risk assets that is keeping the equilibrium rate of interest low. The forecasts of the Fed's "dotters" that we will get back to a 4% fed funds rate in this decade is crazy. More like 2.5% top. This may be bad for Wall Street (another reason they are so glum), but it's great for valuations.

OK, enough of the rant. Suffice it to say that at some point the rally in risk assets may well have legs. I'm guessing that time may be now. This is a risk / reward type of play. I'm long upside calls.

2 comments:

  1. Why? 1. Da'esh is making some feel very insecure. Warranted? No. But perception still counts. 2. Slow growth feels like negative growth. It is a conditioning thing.

    For another view on this subject that probably aligns closely to the view of most macroeconomists: Recession Watch, June 2016 http://econbrowser.com/archives/2016/06/recession-watch-june-2016

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  2. Why....?

    3. Donald Trump's popularity is making some feel very bearish.

    Trump is providing a daily viewing of American dirty laundry, and if one takes it too seriously -- as opposed to being simply symptomatic of outstanding, unresolved policy issues -- then bearish sentiment is the result.

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Comments are welcome, although I can't promise to answer every question.