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THE OPTION ADVISOR
Prepared by
Investment Research Institute, Inc.
To coin a phrase from a popular “oldies” song: “Is that all there is?”
One day of sheer panic followed by a scary morning, and the storm has now passed? The normally alarmist headlines of the New York Post instead screams “hang in there!” the day after “Black Monday 1997,” and they were right? The ever- complacent “little guy” once again dodges a bullet and buys the dip (or at least “hangs in there”)? Much to the chagrin of the still vast coterie of “perma-bears,” the answer to all of the above questions might well be “yes.” And it would be another lesson from that great contrarian Humphrey Neill, who told us 40+ years ago in The Art of Contrary Thinking that “the public is right during the trends but wrong at both ends.” This is a point that has totally eluded the bears throughout the bull market of the 1990's, as they continued to build their bearish case on the bullish enthusiasm of the so-called “dumb public.” Yes, the public will be wrong (in fact, they will be “dead wrong”) at the pinnacle of this great bull market, but that might still be thousands of Dow points away. There are a number of solid factors supporting the resumption of the bull market from here. There was a huge spike on October 27th in the CBOE Volatility Index (VIX) to its highest levels since the 1987 crash. Such spikes have worked like clockwork throughout the 1990's as contrarian buy signals, as they have been indicators of extreme fear by speculators in put options. Plus, all of the major averages and indices have held at their key long-term support levels. Yet I must admit that it all doesn't really feel all that good to me right now. I say this despite the fact that in a recent edition of our sister newsletter, The Option Advisor, I was looking for a “worst case” Dow at 7400-7500, which was pretty much the way it turned out when the dust had settled last week. I say this though I see many more bullishly positioned stocks and industry sectors than bearishly positioned situations. My gut tells me that we need another test of last week's lows and perhaps a move below those levels in order to establish a credible bottom. Why? Because it was all just too easy, too pat, and too painless, and you could cut the complacency with a knife. On the other hand, if the market remains above its support levels and continues to trend higher from here, the benefit of the doubt must go to the bulls. My advice to stock and mutual fund investors would be to lighten up a bit here from fully invested levels.
November 7, 1997Bernie Schaeffer
Investment Research Institute, Inc.
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