Keep Calm And Bet Against The Crowd

It seems like eons ago now, but it wasn't. It was less than two months ago the market looked and felt like it was falling off a cliff... beyond help. As of December 6th, the S&P 500 was off 8% from its September peak, en route to what would ultimately be a 20% drubbing from its high made by December 24th.

It was a selloff that certainly inspired plenty of pessimism about the future.

Cantor Fitzgerald's Peter Cecchini commented on December 10th "Our disposition towards equities has moved from buy-the-dip to sell-the-rally. If I'm not constructive on the credit markets, then I won't be constructive on the equity markets." (He wasn't constructive on credit markets). On the 18th, Instinet's Frank Cappelleri noted "Quite simply, upside follow-through has been lacking, keeping negative momentum in the driver's seat. And if this doesn't change, the same scenario will persist." DoubleLine Capital CEO Jeffery Gundlach told investors on the 17th "This is definitely a bear market."

A week later, a major bottom would be made. A month and a half after that, the S&P 500 would be up 16% from its late-December lows, regaining most of what was last from September's highs.

Hopefully, you weren't listening too closely or taking all the naysaying to heart.

It's a scenario that begs a question though (actually it begs several questions, though we'll focus on one): How can so many smart people be so wrong about what's to come?

Misguided by Fear

There's an understandable - even reasonable - defense. That is, not even the professionals and the pundits are immune to the impact that fear can have on the decision-making process. It was a point in time when things looked grim and felt grim. It would have been difficult for anyone not to toe the line when surrounded by a crowd that was absolutely certain things could only get worse.

That doesn't change the fact, however, that a whole lot of people that should have known better didn't know better.

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