End of Day Update:
Stocks rebounded following early weakness and are within a dozen points of all-time highs. Bears have a million reasons prices should collapse, but the market doesn’t care. That leaves us with only two possibilities, either bears are wrong, or the market is.
Since people love to argue with the market, I’ll start with reasons why it could be wrong. Independent markets are surprisingly efficient even if the participants are irrational. When traders arrive at their opinions independently, one irrational bull is canceled out by an equally irrational bear, leaving us with an astonishingly accurate mid-point. But the key is independent. The system breaks down when groupthink creeps in and skews the results one way or the other. Bubbles are perfect examples of self-reinforcing groupthink on one end of the spectrum. This is the classic, “Their logic seems suspicious, but they’re making money so I’ll follow them anyway.” When enough people suspend their disbelief, we lose independence and the validity of the underlying price.
On the other side, how could bears be wrong? What if instead of evil “market manipulation”, a poor understanding of how markets work is causing bears to lose money? What if the market already fully factored in all of their criticisms and this is the price it arrived at because of, not in spite of, these flaws. Maybe we would be higher without these looming structural problems. Many of these criticisms are recycled headlines that have been around for months, if not years. As a general rule of thumb, if average traders are talking about it, then we can safely ignore it.
So which side is right? Why not both? In the market, being right isn’t good enough. In fact, the only thing that matters is timing. Having done this for long enough, I’d gladly take good timing over being right every day of the week. And so back to the question, most likely both sides are right, but over different timeframes. Bulls will continue being right in the near-term since prices are defying the skeptics. But over the longer-term, nervous traders will forget their fear as they see everyone on the other side making money. Once groupthink is the norm instead of the exception, then we will be ready for the next material correction.
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