Contrary Indicators

Jim Cramer and Maria Bartiromo hosted a Markets In Turmoil special last night on CNBC where they both agreed that we are going to hell in a hand basket. If that is not a contrary indicator than I don't know what is. Everybody says they want to buy when there is blood in the streets but few actually do. The best time to buy has always been when it feels the worst and there are all the reasons in the world to sell.

It was so easy to buy after the February employment report when everything seemed great but it turned out to be a poor time to buy. The correct time to buy was last August after S&P downgraded the US credit rating. The current situations feels a lot more like August than February. Some sentiment indicators are not quite at the extremes we saw in August but they are getting close. The situation in Europe is very scary but it was present in February as well. It was just being ignored. Even if one has a bearish long term outlook it generally does not pay to sell into moments of hysteria. It might make for good TV but it makes for poor investing.

4 comments:

bw said...

vix would seem to indicate we haven't reached peak panic as yet... would like to see a higher level there before making an aggressive contrarian buy, no?

Tsachy Mishal said...

Its my observation that when things are scary people always want to see a higher VIX. If its at 15 they want 25. If its at 25 they want 35.

bw said...

ah, but I would contend that the european situation is at least as perilous now as it was in august of '11 (and the US political situation currently looks worse) and that europe is certainly more precipitate than it was 2 years ago; yet the vix doesn't indicate similarly elevated panic levels... makes me nervous that investors are getting complacent about the assumption that political/centralbank band-aids will be appropriately affixed.

sean2070 said...

I think its a result of the FED.  Market has figured out their reaction function.  For a while it was thought that the old Greenspan put was out of the market as rates hit zero bound.  Now the market believes that uncoventional policies can provide the same put (while the FED has also figured out how to use them which they did not in '09).  Hence rightly or wrongly its assumed the FED can reflate the economy.

That being said we have a reactive fed instead of a proactive fed.  The FED should probably act now as we are not hitting their forecast which is already a low bar.  Instead the FED waits to act until things get ugly.  Hence a put around 1150 to 1200 coming from the FED.  Hedgies have been burnt the past two years figuring out the FED's reaction function as they deleveraged in the summer and missed later rallies.