Conversation on CNBC the other morning centered on why so many financial managers, hedge funds, institutional and individual investors are skeptical about the sustainability of the market’s strength. The debate revolved around whether the skepticism results from the global situation, strength of the domestic economy, Federal budget deficit and its fix, the outcome of the upcoming Presidential election or any of a half dozen more reasons?
I wish, however, there had been a “none of the above” choice because I think the answer may actually lie in basic investor psychology. The answer is as fundamental as the difference in perception, the mind’s eye, between a recovery move higher and a move higher into all-time new high territory. When an individual stock or the market as a whole descends the far side of a valley in a crash or correction it leaves pivot point markers which serve as resistance levels on the near side as it ascends from the valley’s bottom [and for those doubters let me say there always is a bottom except for tulip bulbs and perhaps the Japanese stock market]. Those pivot point markers were the failed attempts to find and create the bottom.
After actually making a bottom and reversing, those earlier failed attempts often mark the approximate levels where fear takes hold that the recovery will fail again fueled by those who rationalize or explain why the recovery will fail and the market or stock will will turn lower again. Remember all the talk back in 2009 about the S&P’s “double-top” that would lead to a final Wave 3 descent to below 600? In August 2009, I wrote:
there are the Elliott Wavers led by Prechter who claim that a “Primary Wave 3″ down will soon get underway because “the DJIA has now retraced a Fibonacci 38.2% of the 2007-2009 plunge in stock prices, meeting a minimum threshold for the completion of the Primary Wave 2 rebound”. One Elliottician blogger also believes that
“the next wave down will likely entail the collapse of Western Civilization. Given the precipice of history at which the world stands, I’m hurrying to complete my thesis regarding the creative insanity of man. There’s a possibility of global nuclear war by mid-October according to my analysis.”
It was pure malarkey then and it is today.
But when the market or a stock ascends ever higher into all-time high high territory there are no benchmarks on the facing wall, no earlier pivot points where optimism slowed the fall which could now turn into skepticism and hesitation about the ascent. Once the ceiling is penetrated, fears and reservations don’t stop the ascent but overconfidence, irrational exuberance and mania will.
Consider the S&P 500 in two alternative periods; the current secular bear market and the other the 1982-2000 bull market (click on images to enlarge):
But what does 10 or 15 years of stock market history have to do with investment decisions today? What does it have to do with the explanations for investor skepticism given by those CNBC talking heads the other morning? The relevance comes from the omission of one important fact not mentioned in the whole discussion: the approach of one of the most significant pivot point benchmarks of the last 12 years …. the previous all time high, a mere 10% away from the market’s current level. (To be technically correct, there is one other lessor precursor pivot point at around 1450 emanating from the other side of the Financial Crisis Crash valley that has to be crossed before the market can break into the clear, blue, cloudless skies of all-time new highs territory at around 1565.)
While the market is still 10% below its previous all-time high made in 2007, close to 40% of stocks are now trading higher than their highs of 2007 including such well-known leaders as QCOR, PCLN, GMCR, REGN, HSTM, SHOO and PRGO.
The secular bear market won’t die easily and it may yet survive forcing us to live through another major decline (that’s from where all that skepticism originates). But then again, those talking heads haven’t yet had sufficient reason to think up the explanations and rationalizations for why the market will break through the resistance into blue skies. But my guess is that they’ll have to start looking for them towards the end of this year.