by Joshua Enomoto
With the S&P 500 making little head-way since hitting 1,900 points last week (an all-time intra-day record), many mainstream financial analysts are beginning to take on a bearish outlook for the domestic stock market, at least in the near term. Does this mean that the contrarian play is now over for those holding a short position as a hedge against downside volatility or should they keep the "faith" and commit to the possibility of inverse gains?
Before directly answering this question, we must first acknowledge that the markets are not run on contrarianism nor any other psychological methodology. Merely taking the opposite side of what everybody else is doing is not guaranteed to net profitable results. Often times, there's a very good reason why the masses are investing in a particular manner and going against the trend in such cases is an exercise in painful futility.
Also, it is very difficult to quantify what the variability in market sentiment truly is in order to apply contrarian strategies effectively. To what degree are market participants leveraged towards one direction or another? Is the contrarian strategy to be applied only in options trading using a put-call ratio? What determines whether this ratio is over-levered or not? How do we apply contrarianism towards stocks or funds that have no derivatives market?
But let's get back to the issue at hand : are the bears justified in maintaining their "short sidedness?" The fundamental arguments still hold in their favor, namely, the economic underpinnings not supportive of excessive premiums in equity ownership. The reason why this argument hasn't resonated deeply until recently is that market valuation, or price, is a product of speculation. There is no hard and fast rule as to what fair market value really is. Ultimately, the price of an asset comes down to a negotiation between buyer and seller and if someone is willing to buy stocks at a particular rate no matter how ridiculous it may seem to select individuals, the market will move according to the terms of the negotiation.
However, astute investors can still make a calculated bet to put the odds in their favor. Obviously, there are a number of analytical approaches to the markets that people can employ. My personal favorite is the statistical approach, using science-based models to better predict the nuances and tendencies of specific stocks and funds.
With the S&P 500 making little head-way since hitting 1,900 points last week (an all-time intra-day record), many mainstream financial analysts are beginning to take on a bearish outlook for the domestic stock market, at least in the near term. Does this mean that the contrarian play is now over for those holding a short position as a hedge against downside volatility or should they keep the "faith" and commit to the possibility of inverse gains?
Before directly answering this question, we must first acknowledge that the markets are not run on contrarianism nor any other psychological methodology. Merely taking the opposite side of what everybody else is doing is not guaranteed to net profitable results. Often times, there's a very good reason why the masses are investing in a particular manner and going against the trend in such cases is an exercise in painful futility.
Also, it is very difficult to quantify what the variability in market sentiment truly is in order to apply contrarian strategies effectively. To what degree are market participants leveraged towards one direction or another? Is the contrarian strategy to be applied only in options trading using a put-call ratio? What determines whether this ratio is over-levered or not? How do we apply contrarianism towards stocks or funds that have no derivatives market?
But let's get back to the issue at hand : are the bears justified in maintaining their "short sidedness?" The fundamental arguments still hold in their favor, namely, the economic underpinnings not supportive of excessive premiums in equity ownership. The reason why this argument hasn't resonated deeply until recently is that market valuation, or price, is a product of speculation. There is no hard and fast rule as to what fair market value really is. Ultimately, the price of an asset comes down to a negotiation between buyer and seller and if someone is willing to buy stocks at a particular rate no matter how ridiculous it may seem to select individuals, the market will move according to the terms of the negotiation.
However, astute investors can still make a calculated bet to put the odds in their favor. Obviously, there are a number of analytical approaches to the markets that people can employ. My personal favorite is the statistical approach, using science-based models to better predict the nuances and tendencies of specific stocks and funds.
But the whammy for large-cap equities is the divergence between the S&P 500 index's growth rate versus the revenue growth rate of the companies that comprise said index. As has been noted by several mainstream commentators, the market has risen dramatically, especially so in 2013. Unfortunately, the actual sales performance of the collective whole has not caught on with investor enthusiasm.
That's not to say that sales haven't been improving : they have, just not at the rate of the stock market. History shows that revenue growth rate has been on the decline and that eventually, discrepancies between market valuation and sales performance are consolidated in a mathematical journey called the regression of the mean. The key question is, will revenue regress up?
We have our doubts...
That's not to say that sales haven't been improving : they have, just not at the rate of the stock market. History shows that revenue growth rate has been on the decline and that eventually, discrepancies between market valuation and sales performance are consolidated in a mathematical journey called the regression of the mean. The key question is, will revenue regress up?
We have our doubts...
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