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Investors should not get carried away by hope that the bull market will continue to thrive after five years of rising prices. The longer a market continues to rise the more people turn bullish, trust returns and good news goes viral, new investors come along seeking easy money and a path to riches, the euphoria is contagious. This explains why the proportion of bulls vs bears has reached record levels – making money is easy, isn’t it? Well, not really.
The irony is that when the proportion of bulls reaches saturation the stock market will invariably top out, at this point there is literally no one left to buy. The Greater Fool theory coupled with extreme optimism are two good reasons why we should be worried and cautious, the bull market is less likely to continue indefinitely under such contrary signs.
But why are so many analysts and experts ignoring the contrary logic and calling for a continuation? They do so because they don’t want to be caught out by wrongly calling a top and looking silly, I mean reputations are at stake when the odds are stacked against you. The experts tend to rationalise their bullish views with technical indicators that don’t look overbought or indicate that the market is not near a top– they find facts to support their beliefs that there’s a never ending supply of steam to keep the market chugging along nicely.
However there are many technical indicators being largely ignored which are bearish right now and don’t agree with the continuation of the bull market. Yet 80% of investors remain bullish and only 20% are bearish.When sentiment gets too complacent and everyone believes they are smart, it’s time to take a step back and reflect on the potentially dangerous territory ahead.
The bottom line is that the majority of analysts and stock market commentators who are bullish are not bullish because everything looks rosy, they are bullish because they don’t really have a clue where the market is heading. When you don’t have a clue you go with the trend. That way the odds are in your favour, you have a higher probability of being right and you won’t look stupid in front of your readers.
I don’t follow the crowd, and if I do it’s because my analysis agrees with the crowd. If I identify a top in a bull market I will explain my reasoning and take appropriate action. That is what I did on 21st February, I twitted “FTSE 100: It’s time to take some protection”. My analysis suggested that the FTSE 100 was forming a top and I was right.
In the midst of this cheerful opportunistic market where perception trumps facts, it’s best to remember that history often rhymes and patterns repeat, it’s intrinsic human nature that drives us so if you can’t remember what happened back in 2008/2009 just take a peek at a few charts.
Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com
