By Nigam Arora
A majority of investors, including those on Wall Street, are suffering from recency bias. As human beings, most of us suffer from such a bias. What is it? It’s the presumption that whatever has been happening recently will continue to happen.
For a decade, the stock market has, more or less, gone straight up.
To balance recency bias, prudent investors ought to look at history to gain objectivity. Let’s explore the issue with the help of a 25-year chart.
Please click here for an annotated 25-year chart of S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.76% , which tracks the benchmark S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.78% . Similar conclusions can be drawn from the chart of the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.68% .
Note the following:
• There is no close historical parallel to the current stock market.
• Stock markets all over the world have been rigged by central banks, which have kept interest rates low for years.
• There is one striking aspect in which the present-day stock market is similar to that of 1999.
• As the chart shows, in 1999, the stock market was primarily controlled by the momo (momentum) crowd. And 20 years later, in 2019, the stock market is primarily controlled by the momo crowd again.
• Nobody wants to talk about the momo crowd because it is not in the interest of the establishment. The stock market is going up not because of higher earnings, not because the economy is getting significantly better and not because valuations are low. Buying in the stock market is occurring simply because it is going up. If analysts were to admit this simple fact, there would not be much need for their seemingly sophisticated analysis.
• The most instructive point from the chart is a big downturn in the market, starting in the year 2000 for three years.
• The chart shows the Arora sell signal and calls to go 100% in cash, buy inverse ETFs and short-sell for those who could in 2007 prior to the 2008 crash. In 2007 it was not the momo crowd in the stock market but the crowd in housing-related securities and speculators in housing. The present period is not like 2007.
• In 2008, most portfolios lost half of their value.
• The chart shows the Arora signal to buy aggressively in 2009, which turned out to be the bottom.