Random Thoughts: Investors Are Bulled Up, but Will It Last?

By Todd Harrison  JAN 22, 2013 10:25 AM

Drilling into social mood versus stock market optimism.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

The stock market is the world's largest thermometer; perhaps that's why international investors are the most bullish they've been in 3.5 years, with close to two-thirds planning to raise their equity holdings during the next six months, according to Bloomberg.

Stands to reason, right? The S&P (INDEXSP:.INX) is up 120% since the March 2009 nadir, which is two months shy of four years ago. Credit acts great, if you can get it, and those invested in the stock market—slightly more than half of the US population, according to the latest statistics that measure such things—saw fear morph into upside greed despite The Devolution of Social Mood.

The stock market is a leading indicator of the economy; this we have studied and learned. The trickier discussion is one of socioeconomics vs. socionomics, or whether economic activity affects social processes or quite the opposite, if social mood shapes risk appetites and macroeconomic behavior.  This debate traces back a long way: Did the stock market crash of '29 cause The Great Depression, or was it the other way around (as I believe)?

The tricky aspect to this discussion, as alluded to above, is the artificial stimuli that have been introduced to the System Formerly Known as Free-Market Capitalism. The bulls will argue it doesn't matter—that price is the ultimate arbiter of variant financial views—while the bears, who respect the action, remain of the view that the imbalances, cumulative still, have simply transferred from one reality to another.

Last week, I wrote a column titled 12 Cognitive Biases That Endanger Investors, and I will admit to falling prey to a few of those through the years (we are always learning in this business). Thus, the question is posed: Does credit continue to signal an all-clear for equities, or is the very fact that most folks are bullish (as the VIX (^VIX) drips toward 15-year support) warrant a more cautious stance, particularly given we're in the heat of the meat of earnings season?

I plan to trade surgically with defined risk as opportunities arise. That's not a cop-out (I used this strategy last year and it was one of my better years of performance), it's simply a reality that works for me given what I see, feel, and am comfortable going home with.  There will be hits and misses along the way, but swinging for the fences, while sexy, most certainly leads to more strikeouts. 

And as always, our first vibes will always be shared in real-time on the Buzz & Banter.

Random Thoughts:

Disclosure: Minyanville has a commercial relationship with RIM.

Twitter: @todd_harrison

Position in spx, commercial relationship with RIM.