Breakout

All That Pessimism Is Actually Your Friend

Breakout

"Pessimism never won any battle," President Dwight Eisenhower once said, summarizing an unflinching determination that carried him through the D-Day invasion of Normandy and two terms in the White House. Today, almost 60 years to the day since he took office, pessimism is again clouding our vision and undercutting our confidence, especially on Wall Street where pros and punters alike are gripped by the uncertainty that's emanating from Washington.

And yet, there are a few contrarians out there who not only refute this pessimism but embrace it. They see the negativity and the unknown outcomes that might emerge from the fast-approaching debt-ceiling showdown as a buying opportunity.

Related: Debt Ceiling Is the ‘Big Wildcard’ for Investors, Says UBS’ Lefkowitz

"There are more positive bullet points on the negative sentimental front," says Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, in the attached video. His seemingly inverted logic adds up all the areas of the investment universe that are signaling doubt and concern right now and acts on them.

"One of our favorite things that shows a lot of negativity is short interest," he says. "If you look at overall short interest on the S&P 500, it's as high as it was last June," a time when stocks had slumped to their annual low amidst fears about Europe breaking up and about China triggering a global slowdown. "Those shorts very well could be a suggestion that, yes, we're overextended in the near term, but there's still a lot of potential buying power that could push this market that much further and that much faster."

At the same time, Detrick is taking solace in an ever-so-subtle uptick in the near-term sentiment polls and in a robust influx of money into domestic equity funds in the first week of the year. Additionally, The Wall Street Journal has raised the prospect that the Great Rotation, or the flight to bonds from stocks, may finally be getting underway.

Related: Bond Market Entering Shift Not Seen Since 1946: Yamada

When asked about the recent revelation that margin debt had grown to a five-year high — suggesting that investors are getting more comfortable with risk-taking again — Detrick concedes that it is a concern. However, he counters with the fact that the put-call ratio is trending up and the junk bond index is hitting a 52-week high.

"We think hedge funds have missed this rally, and we know retail investors have [missed it] with $400 billion coming out of stocks in the past five years," states Detrick. "This bull market could still have some legs, because we're nowhere close to euphoria."

Related: Talking Technicals: The Path to 1,650 for S&P 500

And still, for the second time in as many months, all this drama in Washington has the chance to paralyze investors and deal a significant blow to the economy. Interestingly, there's another Eisenhower quote that fits the time: "Politics have become far too important to entrust to the politicians."

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