Surely one of the most incredible, and often times frustrating tendency in the stock market, is for the major indices to rally in the face of so much adversity. Just when it appears that the world is falling apart through a combination of fundamental, technical, and cyclical factors, some unseen force comes through to unwind the negativity.
This is also why its so difficult to forecast where stocks are headed with a high degree of conviction. Last month all of the experts on TV told us we were headed for (or already in) a bear market. Now those exact same talking heads are waving the all clear flag and talking about how the coast is clear. What changed in so short a time frame?
There is a great saying on Wall Street that I will paraphrase as: nothing changes sentiment like price. Meaning you are apt to get more bearish on the way down and more bullish on the way up. It's natural to become risk averse when you are losing money and want to get back in when it appears everyone else is riding prices higher. Fighting those impulses, or adopting a counterintuitive mindset, can be one of your greatest allies throughout your investing career.
Examining where we are at in the current market, there is no doubt that the recent jump in the SPDR S&P 500 ETF (SPY) has been forceful. I believe that many were positioned for more volatility ahead and were caught off sides when stocks all of a sudden adopted a resilient tone.
This most recent leg higher appears different than the September fake-out. Even modest dips have been bought throughout the rally and stocks have managed to keep down days to minimal blips on the radar. This ultimately creates a “fear of missing out” (FOMO) that propels more and more investors back into the market as they try to recoup their losses or finish the year on a positive note.
No one wants to be the guy who sold and went to cash when their account was down 5%, only to see the market rally and finish the year with a 5% gain. However, there is the potential for just that type of scenario to play out.
