Doug Kass always asks, "Who's more scared? The bulls or the bears?" It's a great question because it's a much different way of looking at sentiment.
I thought of that this weekend as I read my email, because I called for a correction in the market in early October and I've been bombarded with emails from folks who think I'm nuts. After all, the majority of them tell me, this market is just like what we saw last year, and we never got a correction last year.
My initial reaction to that line of thinking is, if you're that bullish, wouldn't you welcome a correction? Wouldn't the chance to buy at lower prices be a major bonus to you? You should actually be hoping for a correction so you can buy the dip -- that is, unless you've used up all your cash already and simply expect a repeat of last year where we never corrected and went only up. How often does the market repeat itself like that?
I've said it before and I'll say it again: It's only human nature to have our views of the current market shaped by previous experience. We all know that history repeats itself, so we look for patterns that have existed before. The problem with that is that most folks look for the recurrence of patterns that happened quite recently. That doesn't stop folks from using that market action as their template.
For example, immediately after the crash of 1987, everyone kept looking for another crash. Yes, during a 20-year period, we do have to have another experience like '87, but it wasn't likely to be in 1988 (or 2008). And after the tech bubble of 1999-2000, everyone kept looking for another bubble. Sure, we got a housing bubble, but not a stock market bubble.
And here we are again, with so many folks looking for a repeat of last year's action as their template for this year. The market is funny like that: It shows us a pattern over and over again until we learn the pattern, and then it changes the pattern.
After the July 2006 lows, it took nearly a year for everyone to realize that the market's corrections were short-lived and lasted only one or two days. Now it seems everyone believes that's the way this action will be.
I'd like to ask a different form of Kass' question: Why are the bulls so scared of a correction?
Last year's decline was vastly different from this summer's decline, starting with the time frame. Last year's began in early May and lasted until mid-July. My calendar says that was two months. This year we had exactly one month before we made a bottom from the highs. Last year it took nearly three months to gain 10% in the S&P 500 off the low. This time it took one month.
Now take a look at the cumulative advance/decline line from then and now. I've boxed off early September last year in red. The a/d line (the blue line) was making higher highs six weeks after the lows in early September. It took the S&P another month to make a higher high.
This time we have the cumulative a/d line well off the highs and the S&P pushing up toward them.
There's more. The Investor's Intelligence bulls were still hanging around 45% six weeks after the market's low. Now they are just over 55%. And heck, by the time the S&P made a higher high last year, the bulls were still only at 52%.
Clearly, sentiment has shifted a whole lot faster this time around than it did last year. Remember, we learn from our mistakes, and the mistake last year was to scoff at the rally.
Six weeks into the rally last year, the American Association of Individual Investors bulls were still at 41%; today they stand less than 1% below 50%. So sentiment was also quite different then vs. now.
The dollar made a minor low in April last year and was rallying by autumn, not making new lows each day the way it is now.
Last year crude oil was down about 20 bucks from its highs as we headed into the fall. Now it is $30 off its lows.
I don't want to sound dire. After all, I'm simply looking for a correction. But there are so many differences between last year and this that to make comparisons seems just a little too pat. In fact, it seems there's more that is different than is similar.
Overbought/Oversold Oscillators
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Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.
