Commentary: Advisers are not betting on rally
The stock market had its best day in over two weeks on Thursday, with the Dow gaining more than 200 points.And yet, the short-term stock market timers I monitor didn't budge: They finished the day just as bearish as they were before the session began.
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Their behavior is unusual, since the typical pattern is for the average adviser to become more bullish as the stock market rises -- just as he tends to become more bearish as the market falls.
Their stubbornly held bearishness is reminiscent of the sentiment conditions that prevailed last fall, when on a number of occasions the advisers I monitor actually became more bearish in the face of a rising market. As we know now, of course, their pessimism formed a strong wall of worry for the bull market to climb.
Why were advisers so bearish last fall? They had lots of reasons, of course.
But, when I recently went back and reviewed what the advisers were saying then, one of their arguments stood out as providing a good illustration of how excessive pessimism got the better of some of those advisers.
The particular argument involved drawing a parallel between the rally that began at the Mar. 2009 stock market low with the rally that began in late 1929, following that year's stock market crash, and which lasted until the following April. A number of the advisers I monitor drew charts superimposing the post-Mar. 2009 performance of the Dow Jones Industrial Average with the index's rally 80 years previously -- and, upon noticing a superficial resemblance, predicted that the market would continue to follow the same script this time around.
That was a very scary prospect, of course, since the Dow dropped some 85% from its Apr. 1930 high to its Jul. 1932 low.
Have those advisers' worries come to pass? Not so far, at least. Almost immediately after they began drawing the ominous parallels, it became clear that the stock market was following an entirely different path. In fact, the market today is about twice as high as it would have been had it followed the script that so worried advisers last fall.
These advisers' response? They just quietly stopped mentioning the alleged parallels, focusing instead on some new found reason for concern.
In any case, it should have been clear to everyone that drawing parallels in this way is shoddy analysis. With over 100 years of daily data available for the Dow, as well as countless more years of stock market performance in other countries, one can fairly easily find any of a number of past instances that appear to bear an "uncanny" resemblance to the market's recent performance. And, yet, hardly ever is it the case that the market behaved in exactly the same way following each of those prior instances.
Of course, the advisers rarely acknowledge that history doesn't speak with one voice on a particular issue. Instead, they too often choose to highlight just one of the historical parallels.
Their behavior reminds of a famous remark attributed to Adlai Stevenson, the Democratic Party's candidate for President in the 1952 and 1956 elections: He was fond of mocking opponents by saying "Here's the conclusion on which I will base my facts."
And it's bullish from a contrarian perspective when the conclusion on which advisers are basing their facts is that the market is going to decline.
- stock market