The low prices in the current equity markets are an indicator of the general fear that Europe will default on its debt. That is why we had such irrationally oversold conditions last week. Many people who were burnt in 2008 continue to be pessimistic to this day, causing them to be flat out gun shy about stocks. When it comes to market timing, flock traders and investors basically don’t get it right. They are following the same trend lines and moving averages with their trading software. However, this is not the right time to reduce your holdings in equities and high yield bonds. This is the time to let others’ pessimism in the market make you money.
It looks like a lot of chartists and hedge fund boys have rushed into the short side of the market. Once we get a trend reversal, which is inevitable, these guys will be caught off guard and will have to buy back to cover their shorts which can really exaggerate the rally.
There is also a mountain of cash in money market as well as a huge surge into long maturity US Treasury bonds, pushing the prices to 2008 highs and their yield to an all-time low. In the last few trading days, TLT has had a vertical rise in its price which looks dangerous. Investors should be very cautious in flocking into this ETF fund at this juncture.
Let this recent panic of the investors work in your favor now. Because once the equities rebound and the treasuries drop the same people that rushed out will have to get back onto the band wagon out of greed not to miss the rally. Ironically when everyone is convinced that the trend has reversed this is actually the time to consider selling to the late comers and into the greed.