August 25th, 2013
by Jeff Miller, A Dash of Insight
Last week I predicted that the major theme for the week would focus on whether rising interest rates would kill the stock market rally. That was reasonably accurate, since the interest rate story was on the front burner during the wild Wednesday announcement of the FOMC minutes and also in the discussion of the disappointing housing news.
On balance, stocks held up pretty well, but the narrative was quite different. I was struck by a bearish shift in tone. Since I follow a wide variety of sources from different perspectives, this surprised me. It was almost as if there was a campaign of fear – and not just from the usual suspects.
This week may see more of the same. With so many anticipating a correction, how many fingers are on the "sell" trigger?
Will fear beget fear?
Experienced investors know markets – stocks, bonds, ETFs, commodities, real estate, etc. – have periods of unusual volatility. No market moves in a straight line. This does not mean that each move can be explained and they certainly cannot be predicted. The profession of punditry requires that experts go on TV or write articles explaining why stocks moved ½%, but it is not usually taken very seriously.
Was I imagining this difference in tone? If so, I am not alone. Joe Fahmy's intriguing post, An Unusual Series of Bearish Events, describes a list of experiences – email, twitter feed, news articles – quite similar to my own and also peaking on Wednesday after the close. There is also specific data in the form of the NAAIM (active mangers) survey, which shows an astoundingplunge in sentiment at mid-week. The article shows the entire data history.
Here is Joe's take:
"Although I've seen this phenomenon of extreme fear before, this series of events seemed very strange to me. Does it mean anything? I'll leave that up to you to decide. Have we bottomed yet? Not sure, but I will say that I've turned a little more bullish going into year-end. Good luck trading!"
I have my own thoughts about the fear trade which I'll report in the conclusion. First, let us do our regular update of last week's news and data.