Weekend thoughts

This post will be rather long, so buckle up.

As you may be able to tell, I focus a lot on investor psychology to determine where I believe the market is heading. To me, there is no better way because I believe whole heartedly in the motto of this blog "The main purpose of the stock market is to make fools of as many men as possible."

The collapse last year made certain people gain celebrity like status. Roubini, Whitney and Schiff come to mind. I wrote the following in April:

A comment on analysts Whitney and Roubini who have recently achieved super star status: From my experience anytime an analyst or strategist or whoever become market sages they inevitably will fall from grace usually shortly after the point when everyone worships their every word (we could be at that point already with these 2). These 2 will WITHOUT A DOUBT one day become goats. Mark my words.

After incorrectly calling for a resumption of the downtrend several times over the past few months, Roubini semi-capitulated a few weeks ago claiming that the worst was over for the markets for now but he believes a double dip recession will occur in 2010. The goat horns are already sprouting on his forehead and if we don't get a double dip recession (which is a low probability event given that it happened only in 1980 and 1982 I believe). Roubini may become hated and laughed at like the permabulls were recently. The same goes with Whitney who capitulated on her bearish stance on Goldman Sachs just prior to their blow out earnings release.

Slowly, these "celebrity bears" are starting to fade from the picture. And guess who have been the best forecasters these past several months? None other than Jim Cramer and Abby Cohen who are the laughing stock of the trading community and still are. Cohen predicted the SPX would hit 1000 a few months ago and probably only a few crickets listened. Cramer's roasting on the Daily Show in March was in hindsight one of the biggest contrary indicators ever for him. Maybe one day Roubini will get the same treatment.

But it wasn't too long ago when Cramer and Cohen were held by most people as market sages. Cohen in particular used to move markets with her calls. She was once the queen of the bulls in the mid/late 1990's correctly remaining bullish even though the market had some sharp and scary corrections. She fell from grace by remaining bullish all throughout the 2000-2002 bear.
When a particular market strategist or guru has been right about the market for a consistent amount of time they begin to attract a large following as people believe that this guru has found the "holy grail" in predicting markets. And just when these gurus are looked upon as gods by the masses, Mr. Market pulls the rug right from underneath their feet and the guru along with their flock of sheep followers get served a large serving of humble pie.

There's a few bear sites out there which I won't mention that gained a very large following and they just experienced what I just described. The retail trading community, in particular the rookies, are still for the most part bears, even if they play the long side. Let me ask you this, how many bullish orientated sites do you follow? Do they even exist now? The most common site I see Joe six-pack retail trader get information from is zerohedge.com which is a bearishly biased site. With the market 50% off its lows and the economy showing signs of improvement the fact that the bear sites are still popular with the dumb money tells me that this run isn't over. Of course there will be corrections but they'll likely be modest until at the very least I see some TRUE CAPITULATION from the stubborn, underwater bears out there.... not this "I've learned my lesson" after getting blown out of the water and then going short the next day. All I see from the burned bears out there is anger and stubbornness. I very much doubt this run will be over until they become silenced and truly humbled. I noticed this same behavior from the permabulls after the tech bubble burst. It took them about 1 year or so for them to become silenced and humbled and even then markets still tanked.

I realize there's some signs of giddiness out there like with CNBC but what do you expect after a 50% run? Some giddiness is only natural. With the natural flow of bull and bear markets you tend to see counter-trend rallies/consolidations when you see sentiment get a bit giddy in favor of the primary trend. That's probably close to where we are right now. AAII sentiment and II sentiment are both close to hitting a 2:1 ratio in favor of bulls vs. bears.

Bottom line: We're likely going to see a significant consolidation with this market soon. I'm thinking there's still room for a little bit more upside (1-3%) but not much before the market will start to cool off and go sideways for a few weeks. I still see a lot of bears out there who have been getting slaughtered still very confident that we are going to crash again in the coming months....some of them I noticed are still in major denial angrily dismissing any positive market data as government lies and upwards moves in stocks as manipulation. How can you not continue to fade these guys?

The following is a message board post of what I believe is the common perception of many retail investors.

"I do not trust this rally. The rally is a contradiction of what the economy is telling us. Fannie Mae just asked for another 10.7 billion dollars. Half of the states are on the verge of bankruptcy. Unemployment continues to be negative. The treat of tax increases looms. National debt has exploded. The baby boomers will soon start withdrawing money for retirement. Thousands of soldiers will be returning home to no jobs. Foreclosures are still rising. Commercial real estate issues have not hit yet. On and on. Until I start seeing companies hiring again, I will not trust this rally. "

This is the wall of worry folks. By the time this guy sees all the data he's looking for the market will be at much higher levels.