Why we shouldn’t fear this market

End of Day Update:

On Thursday the S&P500 lost ground for the fourth-time out of the last six-trading sessions. Fear over an armed conflict with North Korea morphed into fretting over debt ceilings and bond defaults. These latest issues were brought to the forefront two-nights ago when Trump threatened to shut down the government if Congress doesn’t fund his wall.

These relentless waves of bearish headlines over the last few weeks has weighed on market sentiment. AAII’s latest investor survey shows a 6-point loss in bullishness and a mirror image increase in bearishness. The bull-bear spread is nearly 20-points under its historical average as a large number of investors are preparing for the worst.

It is easy to see why pessimism jumped in recent weeks. Tension with North Korea, key members of the Trump administration forced out, barbs exchanged between Congressional leaders and the White House, and now swelling anxiety over a government shutdown and default on U.S. debt.

Without a doubt this market should be in freefall. Yet eight-days of losses over the last three-weeks only managed to knock us down 1.6% from all-time highs. That’s hardly the panic driven selling you would expect given the headlines. What gives?

Bears claim we are on the verge of imploding. They figure it is only a matter of time before this complacent market finally wakes up. But here’s the rub, everyone already knows about these issues because it is front page news. If a group of investors is blissfully unaware, then they have their head in the sand and are unlikely to figure it out any time soon. Not only that, the dramatic swing in investor sentiment tells us these headlines are definitely affecting people’s mood and outlook.

Is there any truth to the bear’s argument that the collapse is coming, even if it is a little delayed? In all my years I’ve never seen the market ponder headlines for several days before finally deciding to plunge. It would be great if the market gave us that much time to analyze the facts and make a thoughtful and deliberate sale before crashing. Unfortunately that’s not the way this works. Market crashes are frighteningly fast and if you stop to think about what is happening, you will get run over. Market crashes are most definitely sell first, ask questions later events.

The simple truth is if the market cared about this crop of headlines, we would have crashed by now. Without a doubt this market is complacent, but the thing conventional wisdom fails to tell us is complacent markets last far longer than anyone thinks possible. This bull market will die at some point because all bull markets eventually die. But this market’s limited reaction to these waves of bearish headlines tells us this is not that time.

If anything the recent bout of negativity and string of down days is firming up support. Every nervous seller is being replaced by a confident dip buyer. This churn in ownership is strengthening this market and setting the stage for the next move higher. I am definitely not a raging bull and have a lot of concerns about this market. But I have been doing this long enough to know a market that refuses to go down will eventually go up. Don’t fight what is working.

Jani

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