Jaded Investors Can’t See Stocks Ever Falling

Jaded Investors

Investors who follow the fundamentals have become jaded. You can tell because there were discussions on FinTwit about how the stock market would rise after the weekend protests and riots. These investors are wrong to suggest the fundamentals don’t matter and they have recency bias. 

We are faced with an extremely overbought market and a negative event, yet investors still don’t believe a correction is coming. They feel this way because the stock market has been ignoring COVID-19 and the terrible economy. Their mistake compounded.

The stock market should have rallied off the March low because we are learning more about COVID-19 and how to limit its growth. That reduces uncertainty. Secondly, we know the economic openings will help the economy recover since COVID-19 is the only reason the economy is in a recession. 

Traders like to jump the gun which means they price in a recovery before it happens. Stocks had already rallied significantly before the first decline in continuing claims came out. In other words, traders made a correct opinion that the economy would recover.

To be clear, in the past couple weeks the rally has gone overboard. A problem jaded investors have is they think the entire rally shouldn’t have happened. It’s easy to feel this way if you didn’t buy stocks in late March. You needed to fight that urge and buy stocks in April even after they had rallied significantly. 

Now that the stock market is about to fall because it is overbought and the riots are shutting down cities, these jaded investors won’t take advantage of the pullback, just like they didn’t take advantage of the prior corrections. Even if stocks fell 10% from here, they wouldn’t buy.

Tech Stocks Are Too High

There is extreme recency bias and a heard mentality when it comes to tech stocks. I spoke to a trader who was advising people to go long Apple with leverage. I think that’s a big mistake as it’s a crowded trade. There is a lot of truth to what is driving mega-cap tech and cloud stocks higher. Most bubbles are based on truth. 

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