Is it a sign that a bear market is coming, when most people are afraid that stocks will plummet?

[steve321]

I saw a survey in which the majority of people answered yes to the question: 'Are you concerned a deep recession will hit stocks next year?' (at the end of this article)
https://www.cnbc.com/2018/10/05/ron-pau ... scape.html
Does that become a self fulfilling prophecy and signal a bear market? I mean, if people are afraid that others will sell and prices will drop, they may end up selling themselves, thus making the prices actually drop. Reminds me of the story of a the beauty contest, I think by Keynes (people don't choose the most beautiful faces, but the faces they think others will consider most beautiful).

[wootwoot]

You should sell the farm and never look back.

[Call_Me_Op]

No. First sign of a major bear market is usually when most everyone thinks that stocks must keep going up - to the moon.

[rkhusky]

Joe Kennedy - "You know it's time to sell when shoeshine boys give you stock tips. This bull market is over."

[FrugalInvestor]

A long-used saying is "the market climbs a wall of worry." In other words, as long as the prevailing sentiment is that the market is about to fall it continues to go up. It's when widespread euphoria sets in that it often crashes. Of course it's only a saying and may or may not apply at any particular time.

[David Jay]

No. First sign of a major bear market is usually when most everyone thinks that stocks must keep going up - to the moon.

+1

[HomerJ]

No one can predict when a crash is coming.

But, in general, it's usually the opposite of what you say.

When most people are euphoric and think the party will never end, that's when it ends.

Look at dot-com bubble, housing bubble, bit-coin bubble.

[Elysium]

It may have already started. We will only know later.

[steve321]

No one can predict when a crash is coming.

But, in general, it's usually the opposite of what you say.

When most people are euphoric and think the party will never end, that's when it ends.

Look at dot-com bubble, housing bubble, bit-coin bubble.

thank you for your answer. I also thought that it worked like this (several other people above also have this interpretation); but recently I saw this article that seems to argue the opposite point of view:
https://www.nytimes.com/2017/09/15/busi ... ology.html

For example, concerning the dot-com bubble, it says

Decades later, in the period leading to the dot-com crash that started in March 2000, we saw eerily similar themes in news articles. The term “tulipomania” began to spike again in the newspaper database, for example. And in a 1996 speech, Alan Greenspan raised the specter of “irrational exuberance,”, a term that went viral by 2000 (I made it the title of a book on the markets that I published that year). When dot-com stock prices started to decline in 2000, people were already primed to rethink their assumptions about the wisdom of holding shares in internet companies.

So I am confused because on the one hand it seems that bubbles burst when there's general euphoria, on the other hand this article implies the opposite because it says they burst when people become afraid of bubbles.
So is it fear or euphoria we should watch out for?

[David Jay]

So is it fear or euphoria we should watch out for?

You should stop trying to guess what the market will do. Admit that it is unknown and unknowable.

In your personal investing, establish an asset allocation that you can live with through thick and thin and ignore the prognosticators.

[willthrill81]

I saw a survey in which the majority of people answered yes to the question: 'Are you concerned a deep recession will hit stocks next year?' (at the end of this article)
https://www.cnbc.com/2018/10/05/ron-pau ... scape.html
Does that become a self fulfilling prophecy and signal a bear market? I mean, if people are afraid that others will sell and prices will drop, they may end up selling themselves, thus making the prices actually drop. Reminds me of the story of a the beauty contest, I think by Keynes (people don't choose the most beautiful faces, but the faces they think others will consider most beautiful).

Keep in mind that around 50% of Americans aren't invested in stocks at all. So there are probably a lot of folks in that survey whose opinions are largely irrelevant when it comes to the stock market.

If most investors actually thought this, they would probably have already sold (i.e. the damage would have already been done).

While the current bull market didn't actually begin until early 2016, the run since 2009 has been called the "most unloved bull market in history." All along the way, there have been lots of folks predicting a crash, and this may have actually prevented one by keeping the market from getting overheated. Last year, with stocks being up every calendar month for the entire year, there was perhaps a little too much optimism, but this year's volatility has got a lot of people worked up again that a crash is around the corner. That may mean that stocks still have room to run up.

But even though I'm a trend follower, I would never try to use such sentiment when making buy/sell decisions. I rely on hard data according to a fixed strategy for that.

[AlohaJoe]

I saw a survey in which the majority of people answered yes to the question: 'Are you concerned a deep recession will hit stocks next year?' (at the end of this article)

Does that become a self fulfilling prophecy and signal a bear market?

Nope, not really.

First, it should be clear that the survey resulted are biased because respondents are self-selecting and the kind of person who clicks & reads a doomsday article is obviously going to be more likely to think stocks are going to plummet any second now. But leaving that aside...

Investors always think stocks are going to plummet. Robert Shiller has been conducting a regular survey of investor beliefs since 1989. That's a quarter-century of data now.

On average, people think there is a 20% chance of an extreme one day crash (i.e. on the order of 1987's Black Monday or 1929's Thursday) in the next 6 months.

That is obviously, and literally, crazy. So just because a lot of people are afraid that stocks will plummet doesn't tell us much because lots of people always think that.

[steve321]

Robert Shiller has been conducting a regular survey of investor beliefs since 1989.

but in the article by Shiller I mentioned in the post above, he says there are periods when people are particularly afraid, with the name 'bubble' often mentioned in the media (as now), which precede severe stock markets.
https://www.nytimes.com/2017/09/15/busi ... ology.html

[Doom&Gloom]

If only there were clear and obvious signs ...

[dm200]

I have actually seen the opposite theory - that when everyone thinks stocks will go up - then it will fall.

[Dottie57]

What is the difference between a crash. And a bear market? The talk in this thread is about both and I don’t think they are the same. I consider Great Recession as a crash. Not all bearmarkets reach those lows.

[steve321]

But even though I'm a trend follower, I would never try to use such sentiment when making buy/sell decisions. I rely on hard data according to a fixed strategy for that.

but isn't understanding sentiment a more clever way of doing that, by going right to the causes of market changes? Looking at price diagrams and all the talk of stuff like Fibonacci and moving averages seems a pretty mindless activity to me.

[Turbo29]

Top of the dot.com bubble was in March of 2000.

Only a little over a month earlier E*trade had this ad for the Superbowl, "Money coming out the Wazoo."

https://www.youtube.com/watch?v=oftjwYmlfoA

It seems to me that the market crashes when everyone thinks the party will never end. Then it does.

[steve321]

Top of the dot.com bubble was in March of 2000.

Only a little over a month earlier E*trade had this ad for the Superbowl, "Money coming out the Wazoo."

https://www.youtube.com/watch?v=oftjwYmlfoA

It seems to me that the market crashes when everyone thinks the party will never end. Then it does.

That's a good video, thanks for sharing. But then how can the market crash if everyone thinks it will go on forever? I mean, in this case they will keep on buying and nobody will want to sell, so why should prices suddenly drop?

[Portfolio7]

I think these types of articles (may) only tell you which way the market is biased (but I don't consider this alone to be a great source).

I see it this way: the market will react to fundamentals over time (short term voting machine, long term weighing machine.) At any one point valuation will be the combination of fundamentals plus market sentiment... this means the current price is based on fundamentals, but may be biased up or down significantly due to sentiment.

When sentiment is extreme / diverges from fundamentals, you may have an opportunity. If you can properly gauge sentiment, and you can properly gauge fundamentals. But you can still time it wrong. 2009-2015 as an example where I believe sentiment depressed the market, and stoked opportunity. The economy was struggling, no doubt, but sentiment was gloom and doom. If you were willing to buy and hold, you did quite well over this time period. Then there are the late 1990's dot.com period, when people talked about a new way of valuing companies. That's a pretty good clue that fundamentals and sentiment may be far apart. I think a good argument can be made that valuations no longer bore a strong relationship to fundamentals at least in the tech segments. But then there is the issue of timing. 1996? 1998? The market ran to the beginning of 2000. I think when this happens is a good time to re-assess just how comfortable you are with portfolio risk (volatility risk).

I try to use this as my guide to some degree. I consider my AA in relative to 1998, when I don't want to miss out on gains, but believe that the market will turn and turn strongly at some point in the future. That provides a self-assessment regarding the appropriate AA for my stock/bond splits, and overall level of risk.

[Carlos Danger]

Top of the dot.com bubble was in March of 2000.

Only a little over a month earlier E*trade had this ad for the Superbowl, "Money coming out the Wazoo."

https://www.youtube.com/watch?v=oftjwYmlfoA

It seems to me that the market crashes when everyone thinks the party will never end. Then it does.

I can't believe this ad is almost 20 years old. I'm just going to ignore that inconvenient fact and continue to adhere to my bull thesis that I am still young and will remain thus forever and ever.

[Turbo29]

Economist Irving Fisher proclaimed that stock prices had "reached what looks like a permanently high plateau." This was nine days before the crash of 1929.

It seems like the euphoria before the crash is a recurring theme.

[GammaPoint]

Euphoria before a crash is typically the thing you see, but that's because euphoria is associated with dangerous risk taking. However, because of the artificially low interest rates we've had the past decade, people have been forced to take dangerous risks to get a decent return. Howard Marks calls these "handcuffed volunteers", and suggests that people are acting euphoric even if they don't feel it emotionally.

In any case, predicting crashes is hard, and there's no obvious sign that anyone knows of, but those who are dismissing the possibility of a crash because they think it has to be preceded by euphoria aren't thinking hard enough about it in my opinion.

[columbia]

Then there are the late 1990's dot.com period, when people talked about a new way of valuing companies. That's a pretty good clue that fundamentals and sentiment may be far apart. I think a good argument can be made that valuations no longer bore a strong relationship

A variation on that is “CAPE no longer means what it used to mean.”

Perhaps, but...

[Cycle]

I feel euphoric about the market, I think it's going to keep rising for the foreseeable future and now is the best time to put your money into the market per your AA. You can't lose, the market has tremendous gains just ahead. The party is never going to end!

[Turbo29]

I feel euphoric about the market, I think it's going to keep rising for the foreseeable future and now is the best time to put your money into the market per your AA. You can't lose, the market has tremendous gains just ahead. The party is never going to end!

I think that post is our "sell signal."

[watchnerd]

I expect either an Italy-correction or a China-correction in the near term.

Whether that leads to a full blow recession / crash....or clears out the dead wood and lays the ground for a new rally...who knows.

[Cycle]

I feel euphoric about the market, I think it's going to keep rising for the foreseeable future and now is the best time to put your money into the market per your AA. You can't lose, the market has tremendous gains just ahead. The party is never going to end!

I think that post is our "sell signal."

The best feature of the 3-fund and regularly buying the market is that we really don't need to worry about when the market will go up or down. We are targeting performance that includes the ups and the downs. We buy the market whenever we have money available.

I don't think there is any way to determine when the bear will enter or how long he'll stick around.

[new2bogle]

A better investor (Buffett) said "Be greedy when others are fearful". To me that means I should stick to my 87% stock allocation. But will I........?

[The Wizard]

No. First sign of a major bear market is usually when most everyone thinks that stocks must keep going up - to the moon.

Right.
Public sentiment is often said to be a Contrary Indicator...

[willthrill81]

But even though I'm a trend follower, I would never try to use such sentiment when making buy/sell decisions. I rely on hard data according to a fixed strategy for that.

but isn't understanding sentiment a more clever way of doing that, by going right to the causes of market changes? Looking at price diagrams and all the talk of stuff like Fibonacci and moving averages seems a pretty mindless activity to me.

More clever, perhaps. But it's far harder to implement. My strategy is very simple, and there is software that does the lifting (which isn't heavy at all anyway) for me in a matter of a few moments once per month. And unlike other strategies, mine has actually been backtested over an extensive time period, so I have a better idea as to how it at least performed in the past.

[goodenyou]

Post hoc ergo propter hoc.

I'm not sure that saying is relevant here, but I really felt like saying it.

[nisiprius]

...but isn't understanding sentiment a more clever way of doing that, by going right to the causes of market changes? Looking at price diagrams and all the talk of stuff like Fibonacci and moving averages seems a pretty mindless activity to me.

"Understanding sentiment" doesn't have any operational definition. It's just one of many theories about how to predict the market, and in this case it is subjective and involves intuition. It can't easily be applied or tested because at any point in time you will find that different people who claim to understand the market's psychology will say diametrically opposite things.

As for "sentiment" being the "cause of market changes," is it? This idea was, to some extent, tested during the Great Depression. People put up big billboards saying "Wasn't the Depression terrible?" with the idea that if you could get people to think about it in the past, it could be made to go away. Actual funeral processions were held in many cities for "Old Man Depression." There was a formal campaign by radio stations, which agreed among themselves to play only optimistic songs, which is why we have so many wonderful cheerful songs coming out of the 1930s. None of it worked.

[Gamma Ray]

I saw a survey in which the majority of people answered yes to the question: 'Are you concerned a deep recession will hit stocks next year?' (at the end of this article)
https://www.cnbc.com/2018/10/05/ron-pau ... scape.html
Does that become a self fulfilling prophecy and signal a bear market? I mean, if people are afraid that others will sell and prices will drop, they may end up selling themselves, thus making the prices actually drop. Reminds me of the story of a the beauty contest, I think by Keynes (people don't choose the most beautiful faces, but the faces they think others will consider most beautiful).

The question would be "what are you going to do about it". One of the things I learned from BH is that fear is never a good thing, but don't be reckless either. Just because it's a bear market doesn't mean stocks will plummet? If it goes into a stable mode for next year or so, how bad can that be? If you are worried about perpetual bear market, than that's something else, that's not a worry, that's a bit of a paranoia. If you are depending on income generating porfolios, they should't be in risky stocks anyway.

[steve321]

...but isn't understanding sentiment a more clever way of doing that, by going right to the causes of market changes? Looking at price diagrams and all the talk of stuff like Fibonacci and moving averages seems a pretty mindless activity to me.

"Understanding sentiment" doesn't have any operational definition. It's just one of many theories about how to predict the market, and in this case it is subjective and involves intuition. It can't easily be applied or tested because at any point in time you will find that different people who claim to understand the market's psychology will say diametrically opposite things.

As for "sentiment" being the "cause of market changes," is it? This idea was, to some extent, tested during the Great Depression. People put up big billboards saying "Wasn't the Depression terrible?" with the idea that if you could get people to think about it in the past, it could be made to go away. Actual funeral processions were held in many cities for "Old Man Depression." There was a formal campaign by radio stations, which agreed among themselves to play only optimistic songs, which is why we have so many wonderful cheerful songs coming out of the 1930s. None of it worked.

These are good points. I guess that there are a few people like George Soros who are able to understand the sentiment, and have the instinct to get out at the appropriate time: he said somewhere that he would get back pains when the market was about to change direction.

For me it's clear that sentiment is what causes people to want to pay a higher or a lower price for the same business, and so determines quick changes in the market. When you have a bear market you get P/E contraction, meaning that people are willing buy the same business for a lower price. Why is that? It's because they have become more pessimistic about the future.

Concerning your example, I think the explanation is the one give by Warren Buffett: fear comes very fast, whereas confidence takes a long time to be established. So when people got fearful and pessimistic about the stock market, it was very hard to make that fear go away, so that's why the efforts of the media etc did not work IMO.

[Turbo29]

As for "sentiment" being the "cause of market changes," is it? This idea was, to some extent, tested during the Great Depression. People put up big billboards saying "Wasn't the Depression terrible?" with the idea that if you could get people to think about it in the past, it could be made to go away. Actual funeral processions were held in many cities for "Old Man Depression." There was a formal campaign by radio stations, which agreed among themselves to play only optimistic songs, which is why we have so many wonderful cheerful songs coming out of the 1930s. None of it worked.

Neither did the "WIN" (Whip inflation now) buttons in the 1970's.

[watchnerd]

As for "sentiment" being the "cause of market changes," is it? This idea was, to some extent, tested during the Great Depression. People put up big billboards saying "Wasn't the Depression terrible?" with the idea that if you could get people to think about it in the past, it could be made to go away. Actual funeral processions were held in many cities for "Old Man Depression." There was a formal campaign by radio stations, which agreed among themselves to play only optimistic songs, which is why we have so many wonderful cheerful songs coming out of the 1930s. None of it worked.

Neither did the "WIN" (Whip inflation now) buttons in the 1970's.

Now I totally want one of those...

[J295]

Some posters have been concerned about being in the market since it breached 10,000 ..... posts about being afraid to invest/or afraid to stay invested are rather common .... but some like to sing the refrain "this time it's different...."

Will there be speed bumps, with some of them more like cliffs .... I've lived and watched "wealth" evaporate on paper and online on Black Monday 1987, 2000-01 tech crash, 2007-09 Great Recession -- I also saw prime rate of 21.5% --- yes, I want a time machine to go back to that time in college and buy 30 year bonds! ... It's extremely likely there will be other speed bumps and cliffs in the future .....

That's why AA and an IPS to minimize or (hopefully) eliminate the chances of acting on fear and greed are so helpful to long term success.

Best regards.

[dm200]

I have NO IDEA if this "logic" is correct or not - but here is the story -

In order for the stock market to keep going up, there needs to be more folks willing and able to buy - driving up the market. When everyone believes the market will go up, those folks have already bought - leaving nobody else to try to buy - and without more folks trying to buy, the market will go down.

[Doom&Gloom]

As for "sentiment" being the "cause of market changes," is it? This idea was, to some extent, tested during the Great Depression. People put up big billboards saying "Wasn't the Depression terrible?" with the idea that if you could get people to think about it in the past, it could be made to go away. Actual funeral processions were held in many cities for "Old Man Depression." There was a formal campaign by radio stations, which agreed among themselves to play only optimistic songs, which is why we have so many wonderful cheerful songs coming out of the 1930s. None of it worked.

Neither did the "WIN" (Whip inflation now) buttons in the 1970's.

Wow! That brings back memories. Seems more amusing now than it did then.

[mindboggling]

As for "sentiment" being the "cause of market changes," is it? This idea was, to some extent, tested during the Great Depression. People put up big billboards saying "Wasn't the Depression terrible?" with the idea that if you could get people to think about it in the past, it could be made to go away. Actual funeral processions were held in many cities for "Old Man Depression." There was a formal campaign by radio stations, which agreed among themselves to play only optimistic songs, which is why we have so many wonderful cheerful songs coming out of the 1930s. None of it worked.

Neither did the "WIN" (Whip inflation now) buttons in the 1970's.

Now I totally want one of those...

You can get them, but they cost more now.

[Rowan Oak]

I feel euphoric about the market, I think it's going to keep rising for the foreseeable future and now is the best time to put your money into the market per your AA. You can't lose, the market has tremendous gains just ahead. The party is never going to end!

I think that post is our "sell signal."

The best feature of the 3-fund and regularly buying the market is that we really don't need to worry about when the market will go up or down. We are targeting performance that includes the ups and the downs. We buy the market whenever we have money available.

I don't think there is any way to determine when the bear will enter or how long he'll stick around.

+1

[aqan]

FWIW markets generally do the opposite of common consensus.