I’ve used a number of different illustrations over the years to explain why I place so much emphasis on sentiment when we’re talking the near-term prospects for the stock market. More recently I’ve described how when the majority of market players fear losing, they’re generally out of the market. When the circumstance(s) they fear either concludes or doesn’t actually occur, they’re left huddled on the fear side of the boat realizing that it didn’t sink after all. Then they either have to fish for a whole new Titanic-esque story, or scurry to the other side (the fear of losing out side) of the boat. Moving from the fear of losing to the fear of losing out means buy stocks.

Here’s another way of looking at it: Save for brand new issues of stock, a company buying back its shares or a public company turning private, generally speaking, there’s a finite number of shares of stock churning within the world’s exchanges at any given moment. Back to my boat analogy: Let’s pretend that there’s this Carnival Cruise ship that caters only to folks who exclusively trade the 700 million outstanding shares of Carnival Corp stock. Today the ship is to set sail on the Mediterranean. As the passengers step on board they’re asked to take a one-question survey:

How do you feel about Carnival Corp stock over the next six months? 

bullish or bearish 

Please circle your answer.

Let’s say that on this particular journey a mere 23% of the passengers are bullish on the cruise line stock’s six month horizon.

Now remember, there’s 700 million shares, representing $36 billion in value, that are held among the ridiculously rich passengers in my hypothetical story. So you can suffice it to say, given the fact that a whopping 77% are thinking the stock’s in trouble over the next six months, that the majority of those 700 million shares (up to $28 billion worth) are concentrated in the hands of a small number (the 23% who are bullish) of massively rich, or, let’s say, massively big shareholders.


Were we to approach our scenario the other way around; if 77% of our voyagers circled “bullish”, then we’d assume that a mere 23% were massively rich folks holding massive quantities of cash. 

So, for only 23% of the traders who trade Carnival Corp stock to have the wherewithal to amass the majority of shares outstanding, make no mistake, they’d have to be very big traders to begin with. And, believe you me, big traders didn’t become big traders by being stupid, or by siding with the crowd.

Times when sentiment is tilting decidedly to one side are times when we can clearly see where the big money resides (on the opposite end of the tilt). Which — as big money is generally smart money — is illustrated vividly in this chart of how the S&P 500 has performed following various levels of individual investor bullishness (this week’s bullish reading is 23.6%):     click to enlarge…

In their book, Quantitative Momentum, Wesley Gray and Jack Vogel liken smart money to sharks at a poker table:

…in the context of poker, picking the right table is critical for success:  

• Know the fish at the table (opportunity is high).   

• Know the sharks at the table (opportunity is low). 

• Find a table with a lot of fish and few sharks.

Well, it appears that there’s an abundance of fish playing at the stock market table these days.

Of course, that’s not to say that things can’t get worse before they get better (that the fish who still hold some shares might panic and feed them to the sharks at much lower prices) — there’s definitely near-term stuff for short-term traders to fret over. But I can say with confidence that it ultimately does get better. Clearly, the smart money is betting on it.

Okay, okay, I know, this is my last weekly message before the election; so I can’t say goodbye without offering up more than a mere mention of “near-term stuff”:

Clearly, as you’ve heard/read here, and elsewhere, the market is nervous about the prospects of Trump becoming our next President. Ironically, the sentiment indicators, like the one referenced above, are very near where they sat the week leading into Brexit; another event that analysts promised would bring the financial markets to their knees. Well, Brexit passed, and after two days of big selloffs, the Dow and the S&P 500 shot to all-time highs. Hmm…

Now, despite the recently rising VIX (the so called “fear index”) and a steadily declining S&P 500, panic has yet to grip the market. In fact, according to a survey performed by Charles Schwab, the majority of folks with portfolios greater than $250k don’t see either scenario as something that would have a “major negative impact” on their portfolio (HT Josh Brown):     click to enlarge….

Not that the majority in Schwab’s survey are necessarily bullish — the AAII survey (the weekly sentiment indicator referenced above) suggests they’re not — it’s just that they don’t see the office of the President holding much sway over the market, especially in the long-term scheme of things.

Enough for now…

Have a great weekend!
Marty