Factors Supporting a Near-Term Bearish Stance

Last year at this time I was most definitely bearish.  I was writing about it week after week, extolling the virtues of being in cash.  As we head into the end of summer being bearish is a much more difficult call, given the current strength of the market and the amount of investors that feel left behind, still carrying boatloads of cash.

With that being said, I still feel the near term direction of the market will be down.  There are far too many reasons why the stock market advance will probably not be self sustaining without at least a near term pullback.  As I said in my recent podcast - will it be a pause or more.  With the amount of investor optimism that is currently prevailing I feel that the next leg down could be something more than just a pause.  Once again a high number of investors will be caught off guard and once again lose money in the markets.

This pattern of investors selling at the bottom only to become interested again near market tops have repeated itself for over a hundred years.  The American Association of Individual Investors currently shows bullish readings of over 50% for the last couple weeks.  Readings this high have generally coincided with mark tops.  Emerging markets, some of the riskiest areas for investors, happens to be the preferred market for new money.  China in particular seems to be a destination for speculators.  Why - Because it has shown the biggest percentage increase since the market bottom. 

Much like driving a car looking only out the rearview mirror of your car - this type of investing can be detrimental to your portfolio.  Chasing is never a good strategy.  The pullback is starting, but unlike last fall, there will be many investors believing once again that the ‘buy the market dip' philosophy will work.  I foresee a two steps backwards one step forward pattern emerging as we retrace a portion of the gains we have seen since March. 

There are inverse ETF's that can be used to hedge your long positions or to acquire outright shorts.  However if the market somehow goes to a new high (for example 1018 on the S&P 500), it is recommended to cover your short positions as the market strength would once again power another leg higher.  The last couple days rally on paltry volume does illustrate how weak the bulls have become.  Volume is way; way down from the last few summers, but to not even trade one billion shares on the NYSE is ridiculous.  Real strength would show up with real volume.  Time will tell, but I think a healthy pullback is the markets next move.