If You're Betting Heavy on the Short Side, Read This

The bears are everywhere.

 

You can't turn on the TV, open a newspaper, or read a magazine without seeing someone proclaim the stock market is about to crash. Indeed, the bears haven't been this popular since Jim McMahon and Refrigerator Perry brought a Super Bowl trophy to Chicago in 1986.

 

Jim Cramer and the CNBC Fast Money Traders are bearish. Longtime newsletter writer and astrologist Arch Crawford says the planetary alignment signals a disaster is coming. Motivational speaker Tony Robbins says it's time to take some profits off the table. Dallas Mavericks owner and Dancing with the Stars celebrity Mark Cuban is bearish.

 

And just about everyone I hang out with is betting on a market decline.

 

I agree with them.

 

The economy stinks. Housing prices are still falling. Unemployment rates are rising. Europe looks ready to roll over, again. And nobody trusts the stock market.

 

Not only does it feel right to be bearish, it feels like an easy trade. But here's the thing...

 

Easy trades usually don't work out.

 

Don't get me wrong. I'm not trying to argue a bullish case, and I'm certainly not recommending you go out and buy stocks aggressively right now. But I am wondering, if everyone is so gosh darn bearish... and if the market is on the verge of a collapse... why aren't we seeing a spike in the Volatility Index?

 

The Volatility Index (the VIX) is the stock market's "fear gauge." It rises when people are scared and running for cover. And it falls as investors grow complacent and comfortable with the stock market. As you can see from the following chart, the VIX hasn't done much of anything for the past month...

 

 

The volatility index is stuck in a trading range between about 22.5 on the downside and 27.5 on the upside. Yesterday, it closed smack dab in the middle of that range.

 

So despite the popularity of the bearish opinion, despite the ominous Hindenburg Omen, and despite the multitude of reasons to expect a market decline, the market's fear gauge is relatively neutral. In other words, investors seem pretty comfortable being bearish.

 

That's probably not reason enough to go out and buy stocks here. But it should be a caution sign for anyone who is betting a bit too heavy on the short side.

 

Best regards and good trading,

 

Jeff Clark

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