Weekly Sentiment Report: A Sure Thing

In 2004, Smarty Jones lost in the Belmont Stakes and failed to capture the Triple Crown.  Yesterday, California Chrome was also unsuccessful in its bid for immortality as the odds on favorite (i.e., “a sure thing”) turned in a less than spectacular performance.  10 years ago, I wrote an article on Smarty Jones and investor sentiment, and with so many people expecting so much from one horse, I wondered was it even worth your time to bet on such “a sure thing”.  After all, Smarty Jones, like California Chrome, was the heavy pre-race favorite and expected to pay less than $2 for a $2 bet.  In other words, why even bet when the payout was so low?

So this brings us to our current market environment, which has morphed into “a sure thing”.  The $VIX  has a 10 handle, and it is at yearly lows; all this suggests that investors are very complacent.  The “smart money”, which was modestly bullish a couple of weeks ago, has turned modestly bearish; the “dumb money” is headed to being extremely bullish.  All this points to the fact that investors are beginning to believe that this market is “a sure thing”.  From our perspective, betting on “a sure thing” really isn’t all that fruitful.  Yet, my dislike for betting on the “sure thing” isn’t so much that I have a belief that all “sure things” must fail, but rather why even play when the pay off on the “sure bet” is so small.

Contrarian investing is not about going against the consensus for the sake of going against the consensus.  This is more about understanding when to bet and when not.  I would view today’s certain market outlook (i.e., “a sure thing”) as a lousy time to go all in.  At these levels of investor sentiment, it is likely (~80% chance) that you will have an opportunity to buy at lower prices.  The other 20% of the time, when the markets trend higher as opposed to mean revert, are generally associated with accelerating economic growth, which is usually seen after a prolong downturn.

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