The SP500 has been able to stay flat over the last 18 months while many sectors and stocks have tumbled. The Russell 2000 suffered a -28% drawdown, emerging markets a -36% drawdown, Energy -35%, Miners -36%, Biotechs -50%.
Behavior plays a huge role in the market; many don't sell until they can't take the pain anymore which is usually a day or two away from a major bottom. Then they usually don't get back in until the underlying has had a huge move, by the time they get back in the move is over for the interim and the cycle begins again.
Flat, choppy markets wear people out; it makes them make more mistakes than they normally would, by trying to make something happen when there is nothing to make. The market might be open 252 days a year, but it is not open for you to make money 252 days a year.
The last time financial Twitter made a big deal about the advance-decline line being at highs and everyone being bearish was back in August 2015, we wrote about it HERE. The gist of it was the same thing, the SP500 A/D line at highs, sentiment was bearish, the Twitter stream was whining, and the positiveness of the A/D line was not trickling down to people's portfolios. Here is the chart from August 2015.
Here's what happen the days after 8/18/2015. One can argue that the majority was correct.
A few points
- I am not discounting the validity of the A/D line, all I'm trying to do is solve part of the mystery on why so many can't relate to this "positive A/D action."
- Part of the reason is; just like last year, the A/D effect is not trickling down to portfolios.
- Some immediately think that if you are arguing against something that you have a bias, market breadth is all about bias they say. As you can see from the picture below, there is no bias here; I'm not short, long and strong until further notice.
- Don't assume what people are doing on Twitter; you have no idea, some manage their twitter account very well, they make you feel like they've caught every single move, and that every high also means a high for them as well.
My opinion and outlook are subject to change as new information comes in.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.