cover features the exclamatory prediction of "Dow 16,000!" and
depicts a bull (replete with a huge Cheshire cat grin) on a pogo
stick bouncing over a fat, slow, and apparently confused, bear.
Clearly, the message this cover wishes to convey is: "Have another
margarita, bulls! There's nothing at all to worry about!"
If I were still bullish, I'd worry about
. (And it goes without saying that one should
drink more than two margaritas before hopping around on a pogo
This cover is the lead-in for
latest Big Money Poll, and the following quote is found within:
"The stock market isn't the only thing that has set records this
semiannual Big Money poll of professional investors also is setting
a record -- for bullishness, that is. In our latest survey, 74% of
money managers identify themselves as bullish or very bullish about
the prospects for US stocks -- an all-time high for Big Money,
going back more than 20 years."
has a bit of history with bullish magazine covers, and it isn't
terribly encouraging. There are some logical reasons that
publications such as
sometimes make great contrarian indicators, and I'll cover these in
Unlike my column (and many other columns here on Minyanville),
are generally more focused on reporting the past than they are on
predicting the future. Of course, this is not to imply any kind of
slight against them, or that there's anything wrong with news-based
publications -- we have to get our news from somewhere. To be
honest, sometimes I'm envious: Writing about the past allows an
infinitely higher degree of certainty -- and involves a lot less
head-scratching, fewer sleepless nights, and virtually no potential
for "getting one wrong" (or criticism about the same, for that
matter). As Yogi Berra once said, "It's tough to make predictions,
especially about the future."
Big Money Poll in May of 2007 was quite bullish in tone, and
(INDEXDJX:.DJI) 14,000 - and that prediction was featured on the
cover in a similar way in 2007. The predicted level wasn't actually
too far off, and was reached in October 2007 after a rally of about
6%. We all know what happened after that: The bullish cover of 2007
was a whole lot closer to the top than it was to the bottom.
When market publications that
stick to reporting the past decide instead to predict the future,
there is somewhat of an intrinsic "conflict of interest."
didn't become hugely popular by publishing stuff nobody wants to
read -- so by the time they're willing to boldly predict something
on the cover, it's at least partially because they feel that cover
will make the
of people want to buy their magazine. Bears obviously don't want to
read an article about "Dow 16,000!" People who own equities do.
This tells us, in a roundabout way, that "bullish" has gone very
mainstream -- and in this way, these types of magazine covers help
indicate when sentiment levels are approaching extremes.
The problem, and I've written about this many times, is that by the
time everyone "knows" something about the market, it's usually dead
wrong. When we're talking about bullishness, there are only so many
buyers out there -- and it obviously takes a constant influx of new
buyers in order for any stock to continue heading higher. Even if a
stock were the
Greatest Most Amazing Stock in the World
(just as a "totally random example," let's say this amazing stock
)), once everyone who wants to own Apple
owns it, then at that point, the share price has nowhere to go but
Think of it like an auction where -- unbeknownst to the buyers
ahead of time -- there will be 50 of the exact same item auctioned
off sequentially, one at a time. Further imagine that
at this auction knows in advance that there are only a total of 49
buyers present for this particular item. In this situation, the
first few times the item comes up, the bidding will be hot and
heavy since the majority of buyers are still competing with each
other. This drives the bid higher each time, and, more importantly,
establishes a psychology of "fair market value" for the item in
everyone's minds. Since the price is continually being bid higher
anyway, each subsequent auction then commences with a higher
starting bid, and the buyers naturally take no issue with this.
There will continue to be some degree of competitive bidding, and
accordant price increases, right up until the second-last buyer
(buyer number 48) secures his item. Then, with no more buying
competition, buyer number 49 will simply pay the high starting bid
-- and for a brief moment, this last buyer will actually think he
got a "really good deal" because no one bid the item any higher.
But trouble starts (seemingly out of nowhere) when the auctioneer
tries to sell item number 50, because suddenly
wants it at the opening bid. He lowers the asking price -- but
still, no buyers. What no one there realizes just yet is that all
the potential buyers have already been converted into "owners," so
there's simply no one left who's interested in the remaining
inventory. The auctioneer looks around in surprise, and drops the
price again, but
no buyers step forward. And now a new kind of trouble begins,
because at that point, all the people who just bought this item
feel like idiots. They're not "happy owners" anymore -- in fact,
now they're thinking they probably paid way too much!
The feeling that we got "ripped off" -- or that we own something
nobody else wants (especially an "investment" nobody wants!) --
brings up strong emotions. These emotions can be exceptionally
powerful when it comes to the markets, because emotions in that
arena are tied to our sense of financial security, which in turn is
tied to our deepest, most primal instincts for
(none of us can survive for long without any financial resources!).
As a result, when the above analogized situation occurs in the
stock market, it can actually generate an
outright selling panic
. The panic psychology is further compounded by the fact that
equities have absolutely no practical use whatsoever in the
physical world. You're essentially buying a really fancy piece of
paper, solely because you're hoping you can sell it to someone else
for more than you paid for it
. This "greater fool" psychology makes the stock market much more
emotion-driven and volatile than the markets for most physical
items. In any case, once a "no more buyers" situation is reached,
the asking price will have to continue dropping until such a point
buyers find the lowered price attractive, or previous sellers find
it attractive once again, at which point a new price floor can be
Do note that I'm not predicting a selling panic tomorrow, I'm
merely noting that the sentiment precursors are in place, and a
20-year high in bullishness shouldn't be ignored. Since I always
try to see both sides of the argument, though, I think it's also
important to note that these types of sentiment indicators are
purely relative, and that makes them difficult to time trades with.
For example, I remember some contrarian investors talking about
what a great time it was to buy equities in 2008 when the polls
came in showing bears numbered around 60%. They said it again when
bears numbered 65%, and again at 70%, and again at 75%... and so
on. The market didn't end up bottoming until bears numbered over
90% -- so the key takeaway is that numbers which look extreme this
week can end up looking mild by comparison in a month or two.
Moving on to the charts, I continue to feel it's more likely that
this is a reaction rally and that bears will take the market back
down again after it's over. The 10 minute chart shown next has a
bit more detail about upcoming resistance levels.
It's worth mentioning that last Tuesday's projection (reprinted in
the red breakout box below) has played out exceptionally well
since. Hitting three turns in advance on a "best guess" isn't too
bad -- especially considering SPX traversed more than 80 points
during that time, and the market's now right back to almost exactly
where it started (!). That projection correctly anticipated about
85% of the move in terms of points captured, as well as the correct
turning points -- so if you traded that roadmap, then you probably
did okay. Hope it helped anyway!
Click to enlarge
We'll see if the original road map continues to track or if
Friday's slightly altered view comes to pass. On Friday, while I
(correctly) projected the rally into the blue target box, I also
slightly favored the idea that would mark the end of the upwards
More Warning Signs for Bulls
). I noted that I didn't feel I could see "two turns down the road"
at the moment, and what would happen after that rally wasn't
entirely clear to me. After studying the charts over the weekend,
it does appear there may be some additional upside momentum left,
so I've noted the next resistance levels on the chart below.
Click to enlarge
In conclusion, last week I outlined a number of reasons why it
appeared that bears were gaining control of the market, and I
presently continue to feel that the current rally will ultimately
stall and be sold. The preferred wave count shows this as a higher
degree wave ii/B, which means that sentiment should remain bullish
throughout this rally, and it will do its best to convince us it's
headed to new highs. At this point, sustained trade above 1577
would indeed call the bear view into question. Trade safe.