Sentiment Speaks: Why Are You So Bearish?

| About: SPDR Dow (DIA)
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Price action over prior week.

Anecdotal and other sentiment indications.

Price pattern sentiment indications and upcoming expectations.

Price Action Over Prior Week

As shocked as so many market participants may be, the stock market has run up into new all-time highs, and even closed near new all-time highs this past week. And, currently, the market is posturing to head even higher, again, much to the disbelief of most market participants.

Anecdotal and Other Sentiment Indications

Most of you have read all the same articles I have for years. The Fed is taking away easy money. The economy is supposedly not doing so well. GDP has supposedly been anemic. Real unemployment is still quite high. Government debt is increasing at an alarming rate. Insurance costs are rising by double-digit percentages annually. The market is being manipulated, and is going to imminently crash. Yes, we have all read these perspectives time and again.

Most of the articles you read about the imminent collapse of our financial system are based on very reasonable perspectives. They provide you very well-reasoned arguments as to why the system is on the verge of falling off the cliff. But, despite all these wonderfully presented arguments, the markets have continued to climb higher than any of the authors of these articles have expected.

In fact, I recently read on MarketWatch that "risks are extremely high, but the recent sentiment on the street has been to treat bad news as good, good news as great, and to largely ignore macroeconomic conditions. They are even ignoring bad earnings results when earnings beat already awful expectations. . . .We're in a market that does not care about valuation currently."

But, remember what Keynes said: markets can remain irrational longer than you can remain solvent.

You see, markets are not driven by reason, but are driven by "irrational" sentiment, as Keynes clearly recognized. Until you accept that your reasoned approach to markets does not work, you will likely remain on the wrong side of the market. Have you ever wondered why we do not seek out logicians for analysis about the market?

Let's face it folks, bearishness sells. It is en vogue to be bearish. In fact, if you ask most market participants at any point in time if they "feel" bearish of the stock market, the answer invariably is that they do.

I am sure many of you reading this article do not trust the latest stock market move, and are still "feeling" quite bearish. But, have you ever asked yourself why you "feel" bearish so often? In fact, when was the last time you "felt" bullish of the stock market?

Roy F. Baumeister, a professor of social psychology at Florida State University, captured the sentiment of this discussion in the title of a journal article he co-authored in 2001, "Bad Is Stronger Than Good," which appeared in The Review of General Psychology.

In that article, he explained that those who are "more attuned to bad things would have been more likely to survive threats and, consequently, would have increased the probability of passing along their genes ... Survival requires urgent attention to possible bad outcomes but less urgent with regard to good ones."

This seems to cause man to become hyper-focused on the negative, which is driven by his innate desire to survive. Furthermore, when we consider that fear is the strongest emotion generated by our brain stem, we can develop a negativity loop that drives us to continually focus upon the negative by our strongest natural tendencies.

Now, we have a better understanding as to why fear or bearishness sells. Our innate tendencies seem to drive us in that direction, despite all the empirical data to the contrary. While our innate tendencies seem to have been pre-programmed within our brain stems to assist man to survive in a life and death struggle, I am not sure such hyper-focused tendencies help us in all aspects of our current lives in which we clearly allow them to reign.

It certainly does not help those who are seeking to profit from both sides of the stock market. In fact, being so hyper-focused on the negative will always have you either missing out on a stock market rally, or, worse yet, shorting one. It is for this reason that we recognize that contrarian thinking is much preferred to "group think" when dealing with financial markets.

Now, consider how many of you have maintained a bearish bias of the stock market since 2009? And, we have heard all the same reasons that feed our natural bearish tendencies. But, one has to question if the fundamentals, which has many currently bearish, will foretell a long term top in our market so that the majority of the market may prepare for the crash everyone seems to know is coming. Well, has the market ever telegraphed such a market decline?

Does all the negativity we constantly read about and focus upon suggest that we have struck the top of our long term bull market? Or are our natural tendencies simply driving us on the "bear bus?" Of course, this does not preclude the potential for the market to give us another pullback this summer. But I really do not see strong evidence that a very long term top is in place for this bull market which began in 2009. In fact, I still believe we will see levels approaching, if not exceeding, 2500 in the S&P500 before we can consider a long term top to the market being in place.

Stock investor John Templeton (1912-2008) is credited with the following bit of investment wisdom in February 1994: "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria."

Does the news flow or investor sentiment sound euphoric? Heck, I can't even find optimistic! Does this suggest that we are topping in a long-term bull market or do we still seem too bearish to be at a major top? Just something to ponder.

Price Pattern Sentiment Indications and Upcoming Expectations

I know many of you will not accept this, but I have been warning investors to shed their bearish bias in 2016, and begin looking much higher. Back in January, as the market was approaching its lows, I was imploring investors to begin to look higher in markets all across the world:

"As I have said before, I still do not think it is likely that the bull market which began in 2009 has concluded. The larger-degree pattern on the attached monthly chart simply does not present as a standard completed Elliott Wave impulsive structure (especially when considering the internal Fibonacci Pinball calculations) . . . So, much of what I am seeing aligns with this being a 4th wave correction, rather than something more sinister. Therefore, once this correction has run its course over the next month or, two I am still looking for the market to exceed the 2300 region on the next rally phase, which should still take hold in 2016.

As an aside, I have to say that there are many indications that the next few months can not only see a major bottoming to the U.S. equity markets, but there are many emerging markets which are tracing out long-term bottoms within that expected time frame, along with a potential long-term bottoming in oil and metals."

Much of what I have expected for 2016 has come to fruition. We have likely seen long term bottoms struck in many emerging markets, as well as the metals complex. Moreover, the S&P500 has also broken out to new all-time highs since we struck our lows back in January of this year.

For now, I will still remain steadfast in my long-term bullish perspective as we look into 2017. My next upside target will either be 2300 or 2350, depending on if the market sees one more correction taking us into August, or we simply continue to "melt-up."

As long as we remain below 2192SPX, my expectation is that the market should see one more correction to the downside before the major rally to 2300+ takes hold in earnest. However, should we see a strong break out over 2192SPX over the next week or two, then it is not likely we will see much in the way of further corrections, and the market has likely begun its march to our next target at 2350 in the fall, on our way to our larger degree target region of 2537-2610 into 2017.

Disclosure: I am/we are long IWM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.