I suppose it only gets mentioned occasionally because it's much the less important part of the saying. There is more than enough money to be made during the trending periods to make up for being temporarily wrong when the finally market reverses. Despite this, however, there are some commentators who seem to be forever in the business of calling the next big turning-point in the stock market.
This week, I’ve come across at least three more sensationalist forecasts of a major high in equities around now. The arguments range from the reasonable - that stocks have yet to price in the realities of recession - to the outright esoteric. I suppose these sorts of predictions help win subscribers, although not to hang onto them for long.
For my part, I cannot help but be impressed by the indices' resilience in recent days. I had thought that if Ben Bernanke failed to promise further newly-minted goodies on Friday 31 August, a more substantial shakeout in equities might occur. He offered nothing concrete, though, and yet the indices held up. In the nine sessions since the highs of 21 August, the S&P and Nasdaq have dropped 2.1 per cent, while the Dow is down 2.6 per cent.
Nasdaq's mild slide
Among the doomsters favourite arguments right now is that the smart money is increasingly and excessively bullish. I recently touched on the importance of following what large 'commercial' traders are doing in the US derivatives exchanges in relation to gold. And the same is true when it comes to stock futures.
How they got it right before
The commercials have a reasonable record of positioning themselves ahead of big moves in the S&P 500, at least at first glance. For example, they got progressively shorter as the market slowly topped out in the year 2000. They then began to reduce their short positioning aggressively as the market bottomed out in 2003. More recently, they were very short at the June 2011 highs and very long around the September 2011 lows, as well as at the lows of 2012.
The smart money and S&P today
And what about today? Well, the commercials’ stance on the S&P is pretty much around neutral in terms of contracts - they've as many long positions as short positions right now. I am aware the situation may be a little different for the Dow, but that is not a heavily traded index among the pros, anyhow. Simply put, I don’t see that the smart money is obviously preparing for trouble ahead.
Gold rallies anew
The recent rally in gold also seems to be holding up nicely. The price has got back above $1,700 (£1,069) - albeit only briefly - for the first time since March. Better still, however, is that silver has been performing even more strongly. When silver leads the way higher, it's a bit like when the Nasdaq leads the other stock indices higher. Generally speaking, it augurs well for the rally's prospects. That this is happening in September - traditionally gold's strongest month - is an added bonus.
