By Keith Fitz-Gerald
According to the Bloomberg News, the recent sell-off has scraped a staggering $3 trillion from U.S. markets and a whopping $8 trillion from global markets between July 22 and Monday of this week.
And still the pros aren't panicking, which suggests to me there's more downside ahead - a lot more.
Indeed, I see the very real possibility that we could re-test the bear-market lows of March 2009.
You can dismiss this warning if you wish. But having navigated global financial markets for more than 20 years, I've learned that sentiment is one of the most powerful indicators of all - perhaps the most powerful indicator.
So the fact that the pros - including our politicians (I think everyone now understands that Wall Street and Washington are linked at the hip) - haven't panicked in the face of this bloodbath suggests one thing: They believe they understand the risks that we face - and that's almost a de facto indication that they don't.
You can analyze all the data you want, run through the market fundamentals and gaze at your technicals until you're in a chart-pattern-induced coma.
At the end of the day, the direction the markets move is entirely dependent on how people feel.
And that, my friends, is the classic definition of market sentiment.
How do we know?
When it comes to professionals, we can turn to the Investors Intelligence Survey, which evaluates marketing-timing signals from professional-investment newsletters nationwide. As of Tuesday, the bulls represented 47.3% - and the bears held their own, with 23.7%. That compares with the prior week's data, which showed 46.3% in the bullish camp and 24.7% of the bearish persuasion.
Or the AAII Investor Sentiment Survey, which attempts to measure the percentage of individual investors that are bullish, bearish or simply neutral on the markets. For the week ended Aug. 20, it's pretty balanced - with 33.4% bullish, 21.8% neutral and 44.8% bearish.
Both are far from the extreme readings that are typically associated with market reversals - either to the downside or, as many investors are now wondering, to the upside.
On May 2, I stated in a Money Morning column that "even the most strident pessimists had become optimists." Therefore, I was extremely concerned about the downturn that has led us to where we are today. That's the sort of extreme I am talking about - when everybody goes to one side of the boat.
And still the pros aren't panicking, which suggests to me there's more downside ahead - a lot more.
Indeed, I see the very real possibility that we could re-test the bear-market lows of March 2009.
You can dismiss this warning if you wish. But having navigated global financial markets for more than 20 years, I've learned that sentiment is one of the most powerful indicators of all - perhaps the most powerful indicator.
So the fact that the pros - including our politicians (I think everyone now understands that Wall Street and Washington are linked at the hip) - haven't panicked in the face of this bloodbath suggests one thing: They believe they understand the risks that we face - and that's almost a de facto indication that they don't.
You can analyze all the data you want, run through the market fundamentals and gaze at your technicals until you're in a chart-pattern-induced coma.
At the end of the day, the direction the markets move is entirely dependent on how people feel.
And that, my friends, is the classic definition of market sentiment.
How do we know?
When it comes to professionals, we can turn to the Investors Intelligence Survey, which evaluates marketing-timing signals from professional-investment newsletters nationwide. As of Tuesday, the bulls represented 47.3% - and the bears held their own, with 23.7%. That compares with the prior week's data, which showed 46.3% in the bullish camp and 24.7% of the bearish persuasion.
Or the AAII Investor Sentiment Survey, which attempts to measure the percentage of individual investors that are bullish, bearish or simply neutral on the markets. For the week ended Aug. 20, it's pretty balanced - with 33.4% bullish, 21.8% neutral and 44.8% bearish.
Both are far from the extreme readings that are typically associated with market reversals - either to the downside or, as many investors are now wondering, to the upside.
On May 2, I stated in a Money Morning column that "even the most strident pessimists had become optimists." Therefore, I was extremely concerned about the downturn that has led us to where we are today. That's the sort of extreme I am talking about - when everybody goes to one side of the boat.
But in two critical areas, we are approaching that extreme : market volatility and gold prices. Not surprisingly, we've seen hundreds of millions of dollars flood into both investments in recent weeks.
According to CNBC, as the Dow was plummeting more than 600 points last Monday, traders poured $162 million into the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) . And this is actually from people who believe volatility would go down, which implies a rally that may be more than the single- or double- day bounces we've seen this week.
It's much the same with gold: New investments in the SPDR Gold Trust Exchange Traded Fund (NYSE: GLD) rose by $1.3 billion on Monday alone. In other words, that one-day infusion was equal to 48% of the $2.68 billion that flowed into the fund for all of July.
If that doesn't stun you, this factoid will: If gold investments continue at this rate, the total amount held by the Gold Trust could actually surpass what is invested in the SPDR S&P 500 ETF (NYSE: SPY)!
And unlike when Apple Inc. (Nasdaq: AAPL) recently surpassed Exxon Mobil Corp. (NYSE: XOM) in market capitalization to become the world's most valuable company, this really will be news because it will herald the next leg down.
And it will happen. How do I know?
Simple. Although we led the charge -- and were way ahead of "the crowd " -- my colleagues and I here at Money Morning are no longer lone voices in the woods predicting gold will hit $2,500 an ounce.
Since 2001, when I first began encouraging clients and subscribers to begin accumulating the "yellow metal" - and from the very beginning of this crisis - gold has risen from a low of $255 to where it is now.
JP Morgan Chase & Co. Inc. (NYSE: JPM) noted Tuesday that gold prices may hit $2,500 by year's end. Goldman Sachs Group Inc. (NYSE: GS), while not biting on the $2,500, has come out of the woodwork with an $1,860-an-ounce target, according to The Financial Times.
Legendary investor Jim Rogers has also notably and vigorously advocated gold, and puts prices in the same neighborhood. (Both of us, incidentally, are worried about the run- up right now, and hope it pulls back - so we can buy more!)
With all this playing out, why aren't the pros panicked?
In a word: perspective.
The average individual investor looks at this market and is directly vested in its performance − because that performance, on any given day, has a direct, quantifiable and highly personal bottom line. Panic, therefore, is a logical and entirely understandable emotion - albeit one that leads to lots of bad decisions.
It's the one emotion retail investors would be wise to control. That's why we spend so much time at Money Morning and in our sister publication, The Money Map Report, on such stress -reducing tactics as trailing stops, profit targets and disciplined plans that one can set up ahead of time.
Professional investors, in contrast, tend to look at charts and figures. And by virtue of what they do, they have learned to calmly, coldly and analytically evaluate what they see.
So far, what they see is a normal market correction.
Technically speaking, we're just barely under the 200-day moving average. And the U.S. Federal Reserve is widely expected to gallop to the rescue again - as are the other central banks around the world. So traders are looking at this as a point of entry.
The real fireworks will begin when they have to scramble to get short or get out.
That's when we'll be buying.
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