Data, Opinion, and Bears, Oh My

posted Jul 14, 2014, 2:50 PM by Katie Shook

Monday July 14, 2014

The problem with the markets at or near all-time highs is that speculation, rumor, and opinion also reaches all time highs.  After a big pull-back you’ve got this prior price history to fall back on for comparison.  Is the recovery rational?  Even if it isn’t, at least you can point to times in the past were people were crazy enough to pay ‘those’ prices.  It’s basically using group anchoring bias as a means of determining whether or not a price is rational.

Take the NASDAQ for instance.  We’ve still not seen the all-time highs of early 2000.  It’s been 14 year now.  But, relative to the S&P500 of the DOW30, the NASDAQ seems strangely rational at these levels.  Meanwhile, the others indexes are driving the bull/bear debate.

Generally speaking, the data isn’t that bad.  You can certainly manipulate it to support an opinion one way or the other.  But by-and-large, things seem to be improving; earnings are ok so far; multiples (outside of social media and a few specific stocks) aren’t totally out to lunch; and economic data indicates we’re on the up-swing.  There’s nothing that immediately jumps out at you and says ‘this thing is way over-cooked right now.’  In fact, it’s the opposite.  The big case for the a pull-back is more about superstition it seems.  “We’re do” is the sort of language that gets tossed around.

Enter the world of outlandish opinion.

Perhaps the best thing the bulls have in their camp is that the debate is not settled.  There is a lot of uncertainty about where this market is headed.  The lack of consensus leaves the option for this market to go higher.  There are a few head scratchers that make one pause though.  A couple of concerns I have looking out for the next month or two are the generally low volatility and the generally declining short interest in the market.  The latter is the bigger concern.

Traders who take short positions are an important part of the supply-and-demand equation for market operations.  When prices fall, short buyers end up creating a portion of the demand.  Without the short buyers, there’s a potential lack of buyers for a declining stock.  This puts sellers in the position of having to further discount their shares in order to find a willing buyer, since only the long buyers are looking to purchase.  Fewer participants in an auction lead to potentially greater price gaps and a widening bid/ask spread.  That can mean bigger drops because of the ‘vacuum’ this situation creates.

Are we at the point where a short vacuum is being created?  I don’t know.  Should superstition become a self-fulfilling prophecy, it’s entirely possible the markets could drop quickly because of this set up.  But if irony has anything to do with it, this won’t occur in until early August right about the time I have my vacation scheduled.  So we’re probably safe for now (cue the sarcasm font).

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