Monday, October 06, 2008

One step closer to a bull market

One of the requirements for changing a bear market into a bull market is for large numbers of normally bullish investors to change their minds, give up on the stock market, and cash out of their stocks and funds. This event causes prices to plummet to more reasonable levels, and also creates a reservoir of reluctant sideline cash which will fuel future price gains.

This morning Jim Cramer, an influential stock picker on CNBC, officially declared himself long-term bearish. To the extent that his followers take his advice and cash out, this will help to accelerate the bear market to its conclusion, and start the next bull market that much sooner.

12 comments:

Anonymous said...

Hmmm. Seems to me like Cramer going Bearish should be a fairly strong signal of total capitulation. It feels like this, too. One of those rare occasions when it seems like a no-brainer that the market will go nowhere but down - at least in the short term. I'm actually thinking like it might soon be a good time to start owning something like JNJ or GE. (100% cash right now).

Tim said...

Dr. Jodi,

Can you please share a little about your education and your day job? I am always interested in people who are not in finance taking a strong interest in it.

Thanks

Jody said...

Normally I would agree with you, but I've seen too many people on the web talking about Cramer as a contrarian indicator. When something becomes common knowledge, it's no longer contrarian. On the other hand, I get the impression that people who normally don't touch their mutual funds for years at a time might actually react to Cramer over the next day or so and cash out, producing a slightly delayed bottom after his signal.

You're braver than I am! I don't anticipate holding any long positions for months yet.

Jody said...

I'm a Senior Research Associate at the Center for Space Physics at Boston University, where I study the atmospheres of other planets through data analysis and computer simulations. I received my Ph.D. in Astrophysical, Planetary and Atmospheric Science at the University of Colorado. As an undergraduate I double-majored in Astronomy and Physics with a minor in Computer Science.

wooderson316 said...

Based on your new stated belief that we are close to a bull as well as your previously stated belief that you don't try to time tops or bottom but ratehr "make money in the middle", why are you still in cash as opposed to dollar-cost-averaging back into the market over a period of days, weeks or months?

Jody said...

One step closer is not the same thing as "close" or "there." We are still in a bear market until the MARKET says otherwise, therefore I am not going long. The market's free fall yesterday and today pretty much makes my case for me.

Someone else left a comment about "making money in the middle" - that wasn't me.

wooderson316 said...

Apologies for erroneously attributing the comment to you.

Jody said...

No problem. I'm sure that any time someone asks a question here, there are several others with the same question on their minds.

jolly_rancher said...

How do you think the internet has changed the dynamics of sentiment indicators? Seems like the Cramer shift is bullish, but because of the internet we all know that every else knows it's bullish. So it's a non-event? In addition to the internet, there is also the idea that investors are starting to learn ... been there done that in 1980, 1991, 2001 ... duh, maybe ride this one out. Can investors really learn and will their behavior change because of Internet and past bear market "lessons"?

My own answer is that fear and greed are instincts and cannot be unlearned because the Internet or history has taught a lesson. Humans are destined to suffer fear and greed as a group. Individuals certainly may learn from past mistakes, but we as people are destined to repeat this particular error. Therefore, I believe that fear and desperation are rampant right now among the majority of investors. This is caused by a quick examination of their huge losses. Look at the incredible redemptions from mutual funds. Look at the VIX. Look at sentiment indicators. Newsletters. People are dumping shares and killing the messenger.

That said, I have no idea how much farther this will go.

Jody said...

Great question, and I think your answer nailed it. No matter how much technology and history we have access to, at the end of the day we're dealing with human beings. It doesn't really matter if it's 1000 brokers watching ticker tape in 1929 or 10 million people watching yahoo finance, because the imperfect and emotional human component is constant.

Funny thing about having access to tons of historical data: a person can always find a way to convince himself that "this time is different!" ... and throw the data out the window. That works for both bears and bulls.

Dan said...

Jody,
What do you think of this ....

http://www.youtube.com/watch?v=bN9WUIXaRr4

TIA

Jody said...

It's certainly better than doing nothing, but he tends to ride down some very steep drops at the onset of bear markets and corrections, and completely missed the 1987 crash.