In the last market update we discussed the positioning of market participants and key levels that the indices were bouncing around. We identified the indices’ level as a polarity zone and were predicting that a decisive move was coming, likely to the upside. As it turned out, that was accurate forecasting. Many traders were caught doubling down and selling into an already depressed market after the S&P declined by roughly 9%. But as is often the case, the market humbled them and they were forced to cover those short positions as buyers stepped back into the market, driving prices decisively higher. The “V” shaped recovery was one of the fastest in history putting it in the 99th percentile of market returns in a two-week span. The semiconductor index was up for an incredible 16 straight days, rallying over 30%.
Large cap tech and semiconductors had been flat or going down while the rest of the market was advancing higher over the last several months. The general thesis is that set-ups like these resolve in the direction of the overall trend. We were still getting signals that the bull market was alive even as the indices pulled back. Underneath the surface more stocks were making new highs rather than new lows and participation was continuing to broaden. Now here we are a few weeks later and all major indices are sitting near all-time highs once again, and once again sentiment is terrible, setting the stage for more market rallying as FOMO sets in and investors are forced to buy in at higher prices.
Nearly 80% of Americans say economic conditions are “poor” or “only fair.” While this is troubling on a human level, it is welcoming as an investor. Because by the time most people think economic conditions are excellent, they likely won’t be. In 2007, when people were feeling great about investing in real estate, buying a second home, or refinancing to take cash out of their house because prices were never going down, that was the time to get out. Same with stocks. If people are reluctant to buy, then it’s probably still a good time to be a buyer. Even, and especially, in advancing markets. Human behavior is silly but at least it’s predictable. It seems like nothing makes an investor nervous like a falling market except for a rising one. The old adage of “buy low, sell high” is a recipe for disaster. It’s much easier to buy high and sell higher. Trying to buy low is often like trying to catch a falling knife. You’re probably going to get hurt. Hunting for something cheap and hoping it stops falling in price is not a strategy, it’s ego. The market punishes ego. The whole thing about human behavior is that we are trend followers. Brand popularity trends, style trends, and so do stock prices. It’s much easier to merge into traffic and exit down the road than stand in front and hope it stops.
Surveys are telling us investors are reluctant right now to own more stocks and are more eager to keep cash on the sideline because of the “high prices.” Yes, both the S&P 500 and Nasdaq recently closed at all-time highs, but that’s not something to fade, that is something to respect. This is how bull markets look. They don’t look cheap, they don’t wait for you to get in. They just keep going. And the irony is that if prices were to meaningfully decrease it is even more unlikely that these same people would want to buy. The data backs it up. On every timescale besides super short, buying at all-time highs has better forward returns than buying on a random day. So, embrace the new highs and try not to get stuck in the mindset of looking to buy low and hoping.