1) The first type is the investor who is sitting out, mostly in cash, barely invested, or refuses to participate. They either feel the market is overvalued or we are about to crash any day. It’s impossible to help these people because they have already made up their mind about what the market SHOULD do rather than focusing on what it is ACTUALLY doing. For example, a potential client I spoke to said he wouldn’t feel comfortable investing money until the Dow Jones drops back down to 14,000. I told him we were most likely going to 20,000 or higher but he laughed and said “no thanks!” This was almost two years ago and he is still in cash.

2) The miserable person who tries to short and fade everything every day. You might think “who the heck is still shorting this market?” You’d be surprised! There are so many traders I talk to who continue to be obsessed with shorting. I have nothing against shorting, I just don’t believe in shorting in a bull market. Many of these traders wait anxiously for “end of the world” type headlines to cross the newswires and cheer for disasters. The funny thing is we’ve seen so many ugly headlines such as nuclear missile launches, terrorist attacks, deadly viruses, and dramatic elections all over the world but still the market barely drops and keeps marching on. You would think they would take a hint from the market’s insane resilience but deep down inside these people don’t want to be successful. I sometimes wonder how they have any money left.

3) The nervous bull. Many traders I know are loaded up. They are concentrated in 5 to 50 stocks/ETFs but they all have one thing in common: The second we get a minor sell program or a big down day, they RUSH for the exits! They do this by either selling positions, buying puts, shorting stocks, buying those toxic VIX products, or raising cash. They might be fully invested or even on margin, but they are watching every tick with the mentality this will end at any second. Even if they don’t rush for protection, they get nervous, freeze, and pray that we bounce. So far, so good because we keep bouncing.

4) The fat cat. This person is loaded up on margin, doesn’t have a care in the world, thinks every dip is a huge buying opportunity, and is convinced the market is going much higher. They don’t care about a -2% drop in the market because the market will just get it back the next day. Very few people are in this category.

The point of this blog post is that the majority of people fall into the first three types, and I consider those categories to be bearish or nervous. The market may seem frothy because it seems to just grind higher every day, but beneath the surface, the sentiment is nowhere close to euphoric. If you don’t believe me, go ask 10 random people what they think of the stock market and you’ll see what I’m talking about. This is a generational mentality that will take a long time to change and could be another reason why the market continues higher over the long term.

I can be reached at: jfahmy@zorcapital.com.

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