Humans can be a funny bunch.
They need answers, mostly to questions like, “Why?”
Whenever I find myself talking to someone about a stock that I think goes up, the next question, always, is, “Why?”
If I’m talking about the market going down, again, they ask, “Why?”
Every single time.
It never fails.
Really? Why?
Why am I buying a stock? And why do I think it goes up?
Well, obviously because I believe there are more buyers than willing sellers at these prices.
How else would the price go up?
If I believe the price of a stock or the overall market is going to fall, you’re asking why?
Well, clearly because I believe there are more willing sellers at these prices than buyers.
That’s Economics 101. “More buyers than sellers” equals “price go up.”
“More sellers than buyers” equals “price go down.”
And then, of course, you get the smartass: “But, JC, for every buyer there is a seller.”
Yes, that’s true.
But here’s the key thing about markets…
There aren’t equivalent numbers of buyers and sellers at every price.
And that’s why prices are constantly changing, and trending either higher or lower.
But Why Are Stocks Rallying?
The Wall St Journal published a classic headline this week that made me chuckle…
“Why Are Stocks Up? Nobody Knows”.
As usual, I think the journalists did a great job here identifying what many investors are thinking and talking about right now.
Journalists are really good at that function.
And I think many people are questioning the strength in this rally, and many are not buying into it.
Good.
Nearly half the economists polled this spring by the WSJ expected a recession to hit over the next year. Nearly half!
The S&P 500 is up 27% since then, in just a few months. This is one of the fastest advances in stock market history.
What caused it?
Mispositioning. These economists had everyone convinced a recession was coming.
Barron’s Big Money Poll of Portfolio Managers was the most bearish ever, and this data goes back to the 1990s.
More than half of those polled by the American Association of Individual Investors (AAII) were bearish 15 consecutive weeks, the longest streak on record.
This data by AAII goes back to the 1980s. Individual investors hadn’t been that bearish for so long… ever!
You get the idea: Everybody was wrong.
It turned out to be the exact opposite of all the things those people believed.
They’re Still Wrong
We’re still seeing evidence many investors don’t believe this rally has legs.
Asset managers and hedge funds are still underallocated to equities. They’re actually net short the Russell 2000 futures.
And, no, they’re not short because they’re hedging, as some might say.
These are asset managers.
The “hedgers” are net long.
Remember, the commercials are traditionally the ones who use the futures market for hedging purposes.
They’re actually net long – the opposite of hedging.
The ones who are supposed to be net long, are the ones who are short.
You want to talk about mispositioning?
This chart showing the net positioning by these speculators comes from my pal SubuTrade.
They’re wrong.
Really, really wrong.
And they’re getting left behind.
What’s in the Russell 2000?
The Russell 2000 Index represents a basket of small-cap stocks, as you probably know.
Many people often forget the index includes more than 250 regional bank stocks.
And you have another 200-plus biotechnology stocks as well.
Not only are the speculators the most net short the Russell 2000 futures in years.
Short-interest in the iShares Russell 2000 ETF (IWM) is hitting new 52-week highs.
These are its largest components.
We’re seeing the highest short interest for biotechnology ever. And you’ve got some of the highest short interest in regional bank stocks ever.
We’re betting all those folks who are not participating in the rally – and especially those folks who are betting against it – will be wrong.
And we’re the only ones who matter in this equation.
So we’re thrilled about it.
I hope you are too!
Stay sharp,
JC Parets, CMT
Founder, TrendLabs