There seems to be an awful lot of negativity, or downward bias: the market has gotten ahead of itself; this run is unsustainable; the economy is still in trouble; expect another leg down…

Why?

Well-wishers saving us from an impending disaster? I don’t recall that many warnings back in October 2007 when the market first rolled over. Or in May 2008 when another leg down started. Or even in October 2008 when all hell broke loose. No doubt there were prudent voices here and there - but not a loud choir! Why now?

Several reasons.

1. As they say, the greatest bear is the sold out bull. Markets hit bottom when the majority sells in despair and there are no more sellers left. So a lot of people sold when the Dow plunged below 7,000. Their selling is what brought the market down. They are the ones who are now in double pain. First, they waited too long to sell and sold at the bottom. Second, they missed the upturn and are now terribly behind. They WISH the market to come down so they can buy below where they sold. To add insult to injury, they probably waited until 2005 or 2006 to get into the market in the first place, when they finally concluded it was “safe,” and are now upside down.
2. Investors don’t change their biases overnight. It’s a long process. Back in 2007 the majority were still bullish, so they could only see the market go up. It took a lot of problems and a lot of repetition to convince the crowd otherwise. Now that it is finally convinced, it is having a hard time changing its mind again. The perma-bears are too loud, so the message being replayed is still negative. Doom and gloom still sells.
3. People tend to act on their most recent memories first. Now that they’ve experienced a devastating bear market, the last thing on their minds is risk taking and a bullish outlook. Besides, the previous bull market first started in 2002 but failed, putting another leg down, until it finally reversed higher in 2003. Logically, people expect the same double-dipping now.

If there is so much negativity, why isn’t the market going down despite all the predictions? Isn’t perception reality in this business?

Not necessarily.

In trading, there is a difference between what people do and what they say. Markets decline when there is a lot of selling. Words don’t matter much. And since most bears are sitting on the sidelines in cash WISHING the market to go down, there is not much they can actually do besides talk.

Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC. TradingZoom provides timely stock picks in small cap stocks to part-time traders who can’t watch the market throughout the day.
http://www.tradingzoom.com/

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