Many, many years ago when I was in high school, I had to choose a poem to read and interpret in front of my English class. I was an athlete and our particular class had a number of athletes in it. This was also the honors English class, so it wasn’t a bunch of dumb jocks in the class. In fact, if I remember correctly, both the valedictorian and the salutatorian were in this class with me.
The poem I chose to read and dissect was To An Athlete Dying Young, by A. E. Housman. It seemed fitting given the number of athletes we had in the class. Here it is 35 years later and there is a particular line from the poem that popped into my head this week. Only it isn’t the actual line that keeps playing in my head. The actual line from the poem reads:
And early though the laurel grows
It withers quicker than the rose.
I took the line to mean that while victory, and the glory that comes with it, is nice, it is also fleeting. The line has stuck with me for all these years as I have continued to compete and coach in athletic endeavors, but it came back to me this week in a far different manner.
I couldn’t help but think about the market and how quickly the fears faded regarding the coronavirus. The fear withered quicker than a rose.
We first started hearing about the coronavirus in the last 10 days of January. We heard stories about how deadly it was and how fast it was spreading. When the first cases were reported in the United States, the stock market got hit hard as there were fears that the virus could have a huge negative impact on the global economy—shutting down travel and slowing trade.
In the course of eight trading days the S&P 500 fell over 3%, one of its worst performances of the past year. Some would argue that it wasn’t really the coronavirus that caused the drop, but rather investors were looking for any excuse to sell some stocks and take some profits off the table. And that may be true, but as soon as the market dropped, investors were standing in line to buy the dip. The fear about the virus seemed to disappear as rapidly as it appeared.
From the low on January 31, the S&P has now gained over 4% – erasing all of the losses from the week before and then some. By February 6, the indices were hitting new all-time highs.
Citigroup issued a statement about how investors were reacting to the dip in the market. “Pretty much every client we talk to wants to buy the dip, and that is not comforting,” stated Tobias Levkovich, chief U.S. equity strategist.
This line of thinking is concerning because anytime investors are in agreement to this degree, it usually means there is a turning point coming. When investors are unanimous or close to unanimous about the direction of the market, it leaves very few investors on the sideline to pump new money into the market.
A few weeks ago we pointed out some comments from the World Economic Forum in Davos and how optimistic the comments were. Those comments were made by professionals within the investment industry and now we are hearing from Citigroup that non-professional investors are looking to buy the dip so soon after the fear sent markets lower.
I have been studying the markets since high school. The same year I had the English class, I had an economics class where the teacher introduced us to the market. That’s 35 years of learning about fundamentals and technical aspects of the market.
I didn’t start studying sentiment indicators until 2000 when I joined an investment research firm that specialized in this aspect of analysis. One of the most common statements made at that firm was from Humphrey Neil, “The public is often right during the trends, but wrong at both ends.”
The hardest thing about using sentiment indicators is timing. It’s hard to tell when the market will turn, and it very rarely turns on a dime. All of the sudden investors won’t buy the dip and the money on the sideline won’t be enough to gobble up the shares being sold. The number of sellers will outnumber the buyers and the trend will reverse. I highly recommend that investors pay attention to these knee-jerk reactions to concerns. They can tell us quite a bit about investor sentiment.