You typically can't see complacency without looking in the rear-view mirror.
So when investors get closer to year's end and look back on the last few weeks of market action, the question is what they will see in hindsight.
Chances are, whatever happens with the market will be less impactful on their future than how they react -- or don't -- to what has been going on.
Right now, all signs point to investors doing nothing. If the market's decline is over, that's the right move, but there is plenty of disagreement as to whether the worst is over, or just beginning.
The Standard & Poor's 500 index (SPX) lost nearly 10% from its Sept. 19 intra-day high of 2,109 through mid-day Oct. 15 , when it nearly touched 1,820.
While I hate the term "correction" -- because it's typically only used to describe a market decline which therefore implies that a market is somehow "incorrect" when it rises -- plenty of investors seem to believe that the downturn corrected or fixed what had been ailing the market, namely high valuations.
That could explain why investors were willing to ride out the troubles.
Fund-flow data from TrimTabs Investment Research shows that investors were, effectively, stagnant during the largest domestic market sell-off of the last three years. In an interview on my radio show this week, Charles Biderman , TrimTabs' president, noted that a "lack of response to a steep market decline" is a bad sign, at least in the short term.
"Interim bottoms" -- the point where the market takes a respite from a decline and starts the next real uptrend -- typically don't happen until investors are scared, Biderman said, and they're not scared
Indeed, the latest American Association of Individual Investors sentiment survey, released Wednesday, noted that nearly half of all investors are expecting stock prices to rise over the next six months, while less than one-in-four investors expects a market downturn over that stretch.
As Biderman noted, investors don't simply change their ways about being complacent, they get jarred or knocked out of that state. There's plenty of academic research showing that investors typically start to bail out when they see declines reach the 15% level. It's how they wind up suffering the worst of the downturn, and then not being around when a more real rebound starts.
"Look, we've had a rally...but if we go back down and go 3% or 4% below the [ Oct. 15 low], I think that will scare people," Biderman said.
The interesting thing is that Biderman actually believes the market will rally from that kind of scary moment; the problem will be for the investors who got panicked out at just the wrong time.
Josh Peters , editor of the Morningstar DividendInvestor, noted this week that the market's flip-flop was nothing to panic over, but he stopped short of calling it a buying opportunity, noting that as a value-oriented investor he didn't believe stocks have reached bargain levels.
Peters noted that investors often see headlines about a market on the move and feel like they must do something, rather than being tactical. The problem is when investors are not so much complacent as frozen by fear.
Sometimes, Peters said, the best advice is "Don't just do something, stand there."
"It's okay to be a deer in the headlights," he added, "so long as you're not standing in the road."
Avoiding complacency right now, therefore, involves considering both tactics and market conditions.
Investors who were nervous as the market went through its short decline have gotten most of that downturn back, and may now want to protect some of their winnings. It might feel like giving into the nerves, but there's not really any "panic selling" when the moves are made on a market upswing.
Protecting profits also generates cash, which makes it easier to see the next market dip as a buying opportunity, because it has put stocks on sale at a time when an investor has ready cash to buy them.
Avoiding complacency is also smart for investors who aren't worried about a significant downturn at this point, but in their case it means looking for investments worth buying.
For a bullish investor who sees the market as using a downturn to set the base for the next rally, the issue is when any downturn sets "sale prices" at attractive levels.
Growth investors -- those seeking stocks with the best growth potential -- tend to see buying opportunities more quickly, because they see the business as growing and the price for that growth discounted.
Value investors, by comparison, tend to look for securities that they think are undervalued; with the market having been at all-time highs prior to the recent decline -- and with the decline having failed to cut a full 10% off the top -- they'll need a bigger decline to get to where they see a real opportunity.
Tim Vick , senior portfolio manager for Naples Trust Co. , noted that anyone who thinks a downturn could provide a buying opportunity should decide in advance the conditions they want to see before they pull the trigger. That makes it easier to be buying at the time when the complacent investors follow the traditional path, get scared by a steep decline and get out.
"When you see declines precipitated by panic selling, it may be time to get in and buy more," Vick said. "That's hard to do unless you know what it is that you are looking for, and then see it happening. Right now, a lot of things have corrected, but just not enough to be excited about....Any correction can be a buying opportunity, but you want to be ready for the ones that will be a good buying opportunity."
AI
