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A Dramatic Increase in Fear…
By Tom Dyson
March 20, 2007
"We've never before seen such a dramatic increase in short-selling..."
My friend Steve Saville lives in China and writes a newsletter with a heavy regard to investor sentiment. I received his latest issue this weekend...
He continues: "The stock market decline that began during the final week of February has resulted in a mind-boggling increase in fear/pessimism."
I agree with Steve. As soon as the trouble hit, the media dumped us with dozens of stories about the yen carry trade, the subprime blow-up, and the emerging market collapse.
It almost felt like the media was expecting these problems, like a cat stalking robins at the birdbath: The moment a problem comes along, they're already flying through the air with their claws exposed.
The markets reflected this fear. The VIX – an index of volatility in the S&P – shot up an average of 60% from its normal level of the last six months. Meanwhile, the put/call ratio – another measure of fear – made an all-time high...
In other words, investors were more scared two weeks ago than they were when the bombs started falling on Baghdad, and the market was as tender as a fresh bruise.
But I can't see what all the fuss about. The Dow Jones Industrial Average set an all-time high three weeks ago. It closed last week 5% below that peak.
And as for the emerging-market stocks... they're only back down to the levels they were at before Christmas.
It makes me think this bull market has further to climb. Here's why:
When markets are at turning points, you get unanimity of opinion… we're nowhere near that now.
At the top, everyone's bullish and it's hard to find a reason why the market shouldn't keep going much, much higher. At the bottom, everyone's pessimistic and investing seems like a lost cause... or even a fool's game.
Right now, the market is optimistic... until something bad happens… then it turns pessimistic in a snap. Traders call this "climbing the wall of worry." Given the quick turns to pessimism, I think we must be somewhere in the middle of the wall.
Said another way, when everyone sells their stock on the first whiff of trouble, it makes me think the Dow, the S&P, and the Nasdaq still have a long way to rally.
We haven't seen any kind of final blow-off buying climax yet... the sort that washes away doubts and makes everyone believe in Dow 30,000 again. Maybe this comes next?
Whatever the case, as a long-term investor who sticks to buying cheap stocks with great fundamentals and high yields, I've got nothing to worry about. If I'm wrong and the market is headed lower, I'm in a safe haven. If I'm right, we make great returns with big dividends...
Good investing,
Tom Dyson |
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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