Why market sentiment does not call tops

Discussion in 'Psychology' started by Locutus, Jan 27, 2011.

  1. Locutus


    and why it is more likely to call bottoms.

    If everybody is bearish, the market may not rally sharply, but it very likely won't go down more than it has already in the near-term (unless there is an outlier event like a financial meltdown, that has to be discounted)

    Traditionally one would expect that if everybody is bullish then prices will go down because everybody has bought.

    This clearly hasn't been the case. If I start out bullish with 10k, I totally overleverage (this is a bad idea but just for the sake of example) and buy 100k worth of S&P futures and I keep my leverage at 1:10. If the market rallies 10% and I want to keep my leverage the same relative to my account size I'll own 200k (I'm not selling obviously because I am still bullish like 90% of the people out there).
    There is absolutely no problem with this strategy in a trending market and it will make you rich very fast if you cash out in time.

    Most likely, people are far more likely to pyramid into a long position than they are to pyramid into a short position (however if participants would be equally inclined to, this would obviously have tremendous downward impact on the market because your position size compared to market cap will grow much faster than when pyramiding into a long position). And as long as there is no real downside to the market, there is no reason to stop buying dips. It has continued to work and those who were betting long will continue to have even more money at every new dip to buy it up. This is probably how upside trends get created. It has little to do with economic fundamentals.

    Anyway, markets are "designed to go up" (except in Japan) so why you would want to pyramid into a short position is quite obvious.

    Anyone else have a theory on why the market can sustain blind/irrational bullishness for much longer (time-wise, price-wise the market can overshoot by as much on both ends) than irrational bearishness?
  2. Anyone else have a theory on why the market can sustain blind/irrational bullishness for much longer than irrational bearishness?


    There is only one reason the market goes up. People think the market will go higher.

    There are hundreds and thousands of reason why the market sells off.
  3. candles


    Didn't you kind of answer your own question when you said ''markets are designed to go up'' ??

    Its way too hard to make money from the short side in something like the ES. Much better of only playing the long side.

    The markets are, indeed, designed to go up over time. There are all kinds of things in place to ensure this, giving the market an overall upside bias.
  4. Locutus


    I was being ironic. The reason markets are "designed to go up" is because this seems to be some kind of religion to which we must desperately cling. Even the government seems to think so. The Japanese market was also "designed to go up" and it nonetheless has been going steadily down for about 20 years on policies which are for all intends and purposes very comparable to US policy.

    There is nothing about the markets that is "designed to go up".

    Anyway, I can see that bullish sentiment is really the hip thing still.
  5. There is nothing about the markets that is "designed to go up".

    Just curious. Why do mutual funds always have to be invested? Why is nearly impossible to be in cash in your 401k? Why can't we short equities in an IRA?

    The whole system is designed to lock up your money and sweat it out because the market is going to go up.
  6. why do they bring in the 'uptick rule' if the market is looking shakey?
    When the market was looking bad a few years ago there was talk of banning short-selling alltogether!
    If the market is down too much, trading can be halted for the day.
    PPT? Fed chucking obscene amounts of money into the market regularly?
    various mutual Funds *having* to be invested??
    Market indexes being frequently tweaked to trim low-performance stocks and overweigh high-performance stocks, thus creating a false impression that overall markets are healthy?

    Market is absolutely geared to go up overall, and guess what...I love it!!! lol
  7. Locutus


    Look dude, just because the FED has been in expansionary mode for the last 30-35 years almost non-stop (some brief pauses) doesn't mean it can keep this up forever.

    In the end stock values are largely decided by the amount of money chasing them and this amount is largely decided by the FED. However the money will contract naturally if artificial money growth is not supported by economic growth, as Japan found out.

    And fuck if I know anything about 401ks we don't have those here. Mutual funds always have to be invested because that's their job. I wouldn't put my money in a mutual fund. A long/short hedge fund with a good track record maybe but equity mutual funds are really not where the fun is at.
  8. Locutus, I think that Paul_Alan was quite directly answering you with some examples.
    The read is about the stock market, I believe. The stock market is heavily rigged to an upside bias. Paul_Alan mentioned many of the ways in which this is implemented in regulation. It is just as ingrained as the social security system.

    As mentioned previously, there is a sociological factor. We are all in this together. Those retired gentlemen whose money is sitting in those mutual funds worked hard to build up their employer. Now they are expecting the next generation to pull its weight. Note just for him, but for all of the current and future retires. To be a shorter, is to be a despicable, selfish bastard. Someone who steals from widows to buy a sports car. You get the idea. The news makes its money off of validating its audience (tricky thing when the audience is usually divided.)

    Every week, money from millions of paychecks is being pumped into 401K accounts. These funds must be invested to buy stocks. Not trade stocks, but buy stocks. Since the stock index components and the major mutual fund components are highly correlated by design, the stock indices have a built-in uplift (which is not fully matched in anyone's return.)

    It is just reasonable to suppose that when the economic factors for a down trend have weakened (not necessarily gone, just mean trend within the standard deviation), the uplift can make a nice clean chart. The same does not seem likely at the top of the market. In that case, the uplift is being overpowered by a growing-stronger economic force.
  9. 1) Upside bias to indices over time (S&P real appreciation of 2% per year, plus inflation). You are virtually certain to make money eventually in nominal terms, if you just hold on long enough.

    2) Structural factors that keep Wall Street perpetually bullish (fee structure, desire to sell securities and investments), and steady dribble of buying pressure on the market due to 401(k) investments - though this last factor might turn more neutral in the coming years as Boomers liquidate

    3) Markets can only go down so far. Buying gives you a fixed maximum risk, while shorting has unlimited risk. Many investments pay dividends or interest which can become quite substantial when the price is depressed, and can greatly offset the risk of price declines or poor performance, and place a 'floor' on value that everyone can recognize.
  10. candles


    If only this thread was made a a few years ago, we wouldn't have had a gaziliion 'top is in' threads and a lot of people here may have saved themselves some nasty losses! lol.
    Yes, long only here on the ES.
    #10     Jan 27, 2011