Two Reasons To Be Bearish ~ market folly

Friday, August 28, 2009

Two Reasons To Be Bearish

.... At the very least for the short-term. While we could throw out all kinds of economic data and a laundry list of fundamental problems, we instead want to focus on two market related datapoints. Firstly, short interest was recently released and the fine folks over at Bespoke have highlighted that, "the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9% This is the lowest level since February 2007." They also point out that extremes typically happen in each polar direction. When short interest is high and all the late-to-the-party bears have arrived, the market can run. Conversely, when short interest is at the lows, be scared.

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That information all but ties into what hedge fund manager Doug Kass highlighted recently: everyone is bullish and rushing into stocks. Mutual fund inflows have risen and they have put their new cash to work while hedge funds have had their highest net long exposure in some time.

The second datapoint we want to highlight is not so much data as it is a flowchart of market possibilities. Specifically, we are talking about the four stages of secular bear markets. Barry Ritholtz over at the Big Picture has posted up an excellent chart that illustrates just that.

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As you can see, it argues that we are almost out of the 'rebound rally' phase of the secular bear market. What's on deck next, you might ask? A roughly anticipated 25% correction downwards, assuming this is a secular bear market. That's a whole 'nother debate but we wanted to post up these interesting tidbits as we start to become cautious ourselves. After all, the market is up over 50% since the March 2009 lows. While such caution is most likely warranted, we could be early with such sentiment. (Forgive us for such a sin as 'being early' ... we attribute this to the volatile market of 2007-08 that has scarred us for life). And as always, we are reminded that markets can remain irrational longer than you can remain solvent. In the mean time, our list for reasons to be bearish continues to grow.

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