Markets Are Crazy, and Crazy Doesn’t Quit

The last few weeks have been negative for the markets. The S&P 500 is down almost -14.5% from the August relative high. In the last week, all but one day were down at least -0.80%. According to the media, this all comes as a reaction to Fed’s “hawkish” action and high inflation. Financial markets tend to bottom when the news is at its worst.

The first 2 weeks of the NFL season had been rough for the Colts. They tied one of one the worst teams and got shutout by Jacksonville. The betting line for this weekend's game between the Chiefs and the Colt's opened at Chiefs -6.5 points. However, as time went on, the betting spread moved towards the game in favor of Colts, because gamblers were more likely to bet on the team that won. The game ended up being a victory for Colts and a surprise for their fans. It's similar to the way the market works. If more people bet in favour of a certain side, then the line moves in that side's favor.

The American Association of Individual Investors (AAII) has been conducting a weekly sentiment survey since 1987. The latest survey, from 9/22/2022, showed that only 17% of investors were bullish and 60% were bearish. This is the lowest percentage bullish for the year and the highest percentage bearished for this year. The historical average of investor sentiment has always been 37% bullish, 31% bearishly. However, the current survey shows the 4th largest percentage of bears since the survey’s inception.

The market is oversold, but it does increase the probability of a bear market rally. Bearish investors are already in cash. The flight to safety has been to cash, so there are not many people left to sell. An adaptive portfolio should have less volatility than the markets and come off of bigger base value during the market's rallies. Eventually, the bear will end and a new bullish one will begin.