Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
On Fri January 16th, the following appeared on the site, I think by Jason Goepfert. This post basically marked the closing high for this year so far on the NASDAQ. From that day's high to this week's low, the QQQ went from 38.63 to 32.72....not bad. While Minyanville readers were getting this sort of educational analysis, readers of other websites and teletubbie followers were hearing about "blue skies" and "new paradigms."
"Last Friday, I said that there were several data points that concerned me - things that suggested speculation was so frothy that it usually portended at least a short-term pullback in equities. To the collection of "complete lack of fear" readings, we can add the sentiment survey from the American Association of Individual Investors (AAII). Their latest poll came out this week with a scant 10% of the respondents saying they are bearish on the market's prospects over the next six months.
The percentage of bears in this survey has been this low or lower only six other times in its history, going back to 1987. Looking at those other instances, one week later the S&P was lower 4 times, with an average loss of 1.9% (and a largest loss of 4.7% and biggest gain of 0.6%). Six weeks later, the S&P was lower 5 out of the 6 times, with an average loss of 3.3% (and a largest loss of 8.0% and biggest gain of a mere 0.4%).
Obviously, with only six samples we can't be too confident in the ability of this data to accurately predict the future from a statistical sense. But combined with multi-year low volatility levels, small-trader emphasis on call options (the CBOE reported over 1,000,000 equity call options traded yesterday) and near-complete disregard for put protection, and the overbought condition of the broader market, I am very concerned about the potential for unexpected events to have an unwelcome effect on the market over the next few weeks. I know this seems a bit like Chicken Little with the market hitting new highs this morning, but those who are unaware of the risks are most likely to suffer from them."
Thanks for the kind note and yes, it was a heckuva vibe from Professor Goepfert. I'm not posting this mailbag as a "victory lap"--there's no place for that in our business--but rather to highlight an important distinction. Please note that Jason wasn't telling folks what to do or offering advice. Rather, he's sharing HIS view, HIS tools and HIS take with the hopes that Minyans extract value and make better and more informed decisions for themselves.
This subtle yet massively important distinction is what differentiates Minyanville from the rest of the pack. Lots of websites claim that they'll make you money but can't possibly know your unique risk profile or time horizon. Still, blind believers follow perceived pied pipers and piggy back their action without fully exploring the risks or doing their homework. That, along with the ingrained perception that profiting is a right rather than a privilege, is partially responsible for the misled masses.
The years ahead are going to become increasingly difficult and the excess capacity will continue to be weeded out. I've been singing the same tune since early 2000 and it continues to unfold. The road ahead is fraught with risk as the entire financial dynamic shifts and sifts through the post-bubble world. It won't be impossible to make money, mind you, but the tails of return have clearly mitigated and should continue to do so. And if we're not smart with what we do and how we do it, we run the risk of becoming an unfortunate statistic.
A pleasant thought? NO--but with the right eye and the proper network, the odds of success are greatly enhanced. And that, my friend, is what Minyanville is all about.
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