Being a stock-market bear is excruciating right now.
It's bad enough taking a beating from constantly climbing stock prices. The Dow Jones Industrial Average ($INDU) and the Standard & Poor's 500 Index ($INX) are both up 7% this year.
But there's something even worse than losing money when you’re a bear: It's losing money while knowing that you're right. This stock market is overvalued, as these market pessimists argue. This rally is built on a flood of cheap money. Earnings growth is slowing. There are speculative bubbles all over the world, from the apartment market in Spain to the stock market in Shanghai. And yes, there will be a day of reckoning for the global financial system.
But in the meantime, while they wait for Armageddon and the days that will divide the prudent from the reckless, bears are getting killed.
Why it matters
It's important to understand why so that you don't tune out these important voices of caution or get scared out of the stock market years before it's necessary. It's likely that we'll have one of those run-of-the-mill seasonal corrections of 5% to 10% relatively soon, probably within the next month or three. The stock market looks increasingly overextended here, with the number of new highs on the New York Stock Exchange failing to keep pace with the new highs for the S&P 500. That often flags a coming correction, which, given the historical weakness of May and June following the strength of April, wouldn't be a big surprise.
But the kind of big "I-told-you-so" downturn -- a drop of 15% to 20% or more -- that the bears have been calling for could be as much as three to five years away.
Bears are notoriously early, of course. Yes, bearish pundits did call the bear market of 2000 to 2003, but they started to call it as early as 1995. An investor who heeded those early warnings and moved to the sidelines would have lost the chance to make a lot of money.
Bears are so frequently early in their calls because they have a rather admirable and idealistic faith in fact and logic. If they can show that global liquidity has been expanding at the kind of breakneck pace that always produces a crash, that earnings growth is slowing, that earnings-per-share numbers are overinflated and that housing prices are falling, then they believe that investors will act rationally and sell their investments. The markets will crumble
All I have to say is I'm here to give my personal opinion, and you don't have to follow my advice, please do your own DD before you invest. And don't blame others for your bad choices".
