Too Many Bears Spoil The Crash (or Correction)

Too Many Bears Spoil The Crash (or Correction)

By, Simon Maierhofer

Tuesday May 06, 2014

This article takes a look at a non-scientific, but often effective indicator: Media headlines. Investors’ decisions are often based on the media’s take on the market. This makes it a potentially potent contrarian indicator.

Too many bears spoil the crash (or correction) just as too many cooks spoil the meal.

Investors are expecting a correction. In fact, too many investors are expecting a correction. Below are a few very recent headlines:

The 'Non-Scientific Headline Indicator'

“This chart says we ‘re in for a 20% correction” – CNBC
“Risk of 20% correction highest until October” – MarketWatch
“Are U.S. markets on brink of an 11% correction?” – Bloomberg
“A deep correction’s on the horizon” – TradingFloor.com
“This chart is ‘ominous’ for S&P” – CNBC
“Wells Fargo strategist presents scary chart” – CNBC

The market rarely does what the masses expect. Quite to the contrary, the market likes to surprise the investing herd. The 'non-scientific headline indicator' suggests some kind of a pop is needed to fool the crowd.

After all, if the S&P 500 (SNP: ^GSPC) dropped 11% or 20% right now, where would be the surprise effect?

The Profit Radar Report’s 2014 Forecast (published on January 15) predicted an S&P 500 (NYSEArca: SPY) high sometime in April/May/June (see forecast excerpt below).

Unfortunately, this outlook has now become the crowded trade.

Interestingly, the media has gotten so bearish that it even reports on it’s own gloom-and doom bias. To wit:

“The boys who cried wolf: Crash prophets on the rise” – Yahoo Breakout

Based on the 'non-scientific headline indicator' the bear's best hope for an immediate crash might be that two negatives (the media reporting on its own bearish bias) make a positive.

What's the message of real tried-and-true sentiment indicators?

Here's a detailed analysis of five sentiment indicators (plotted against the S&P 500) and their message:

Should We Worry about the 1987 Crash Parallel?

PS: The 1987 crash parallel is in reference to a recent USA Today article that essentially included a countdown to an imminent crash.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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