This has been one of the most frustrating “bull markets” in history. I put that in quotes because, as I’ve noted multiple times over, this looks more like a concentration bubble in broad market averages. Even though the S&P 500 and Nasdaq are hovering around all-time highs, the vast majority of stocks — roughly 70% — are trading below their respective 2021 peaks. Think about that for a moment: 70% of stocks have made no progress in three years. One can argue that bearish sentiment actually has been correct all along; it’s just difficult to believe when looking at market-cap passive indices.
Yet, I don’t see any bearish Wall Street strategists anymore, despite these divergences persisting and economic data recently surprising to the downside. It seems nearly everyone — the macro thinkers, the portfolio managers, the chief investment strategists — has capitulated to the narrative that this is a bull market. And honestly? I don’t blame them. The pressure to be bullish is real. This is how portfolios are positioned and no company wants to be seen as missing out on a bull move, regardless of what their analyses say.
To most people, the stock market today is the S&P 500. Investors tend to favor their domestic market and stocks that make headlines, not caring about the nuances of the market as a whole. They’re only watching that core part of the marketplace, even if it’s getting narrower and narrower in breadth as most stocks are failing to reach new highs.
I have felt the pressure myself. My skepticism of the market over the last several months — despite headline averages pushing new highs — has resulted in followers mocking me for being wrong and tagging me as a perma-bear. I clearly am not. I’m simply giving voice to the truth that when you actually look to the left of the equal sign, it’s clear just how bizarre this market has become.
It’s more than just Wall Street strategists who are ignoring the 70%, though. A look at short interest (see chart below) is very telling when it comes to what positioning the crowd is actually taking. This looks wildly complacent to me, with short interest in broad market averages at among the lowest levels in several years. Yes – everyone is on the same side of the boat, holding an anvil.
I’ve been in this business a long time. I’ve had plenty of wins in my analyses and plenty of losses in my analyses. I don’t see at all how this can possibly end well. The crowd is right on average, but wrong at the extremes. And this looks like such an incredible extreme that it screams caution for those who have the intestinal fortitude to think independently from the crowd.
It’s Time to Prepare for Inevitable Volatility
In practice, to be clear, that does not mean you should short or try to time the market with cash. Rather it means you should consider rotating to areas of the investable landscape that could benefit from volatility and a reversal in fortunes for large-cap stocks. That might mean utilities, healthcare, consumer staples, gold, the dollar, and yes – potentially longer-duration Treasurys.
When will any of this matter? I don’t know. I’ve been wrong in thinking a correction in stocks that’s deep in magnitude would happen sooner than later. But the extremes that concerned me before are only getting more extreme. At some point, this volatility will inevitably hit, likely when no one is prepared for it. And when it does, it will be clear the bears should have never left.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
