Are you loving this market or hating it?

Data would suggest that this market doesn’t exactly have you enthusiastic. The latest sentiment readings show very average sentiment, which is not the sort of thing I would have expected with the market making new all-time highs. The fact that the market has gone straight up for six months without any meaningful decline makes it even more bizarre. Isn’t that the sort of thing that’s supposed to fill investors with confidence?

In fact, right up until this last week, sentiment was well below historical norms.

So today we’re going to talk about why. Why there is such a disconnect between sentiment and reality?

Because it’s relevant, I’m going to re-print a brief passage from the February issue of Alpine Advisor. At the time, I was sketching out a basic strategy for the year as the market was approaching a new all-time high and key technical resistance levels. One of two things was going to happen, either the market would get up into that new high range and then correct, or it would bust on through and carry itself higher.

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It’s May.

Does that mean it’s time to sell and go away?

People always ask this question at this time of year and I usually write something about it. Don’t worry, I do have an answer for whether or not you should sell and come back later.

As much as I hate heuristics like this that have tenuous reasons for fundamental legitimacy, they are fun to talk about. In the case of the the “Sell in May” adage, it supposedly dates back over 100 years to traders in the London Financial District. Wealthy families like the Crawleys would spend the winter shopping and consuming in London before retreating to their country estates for the summer months. (Although if I was the Earl of Grantham or one of his daughters’ myriad suitors, I’d want to stay in the country all year ’round.)

The adage only really became famous when Stock Trader’s Almanac did a study on it and showed that performance during the summer & early fall months is generally much weaker than during the winter and spring months. Plenty others such as Ned Davis and these guys have also done high profile studies and have reached similar conclusions.

I suppose investors do have reason to be concerned about the summer months. Historically, May has been one of the worst months and September, the month after which you are supposed to return to the market, has a history of being the real troublemaker.

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As long as man has been able to keep record of his thoughts, he has repeatedly asked himself one simple question.

How’s it going to end?

It’s a question that matters above all others. It haunts us when we are young and naive, and it haunts us still once we have grown old and wise. It haunts us because we do not know the answer and never will.

Some day we will die, each and every one of us. You, me, John Paulson. And whether that’s an event that ultimately resolves the great mystery for us, our question will remain unanswered until that moment. It is the “we” of the present who are forced to dwell perpetually in the dark, albeit a different kind of darkness.

We erect all sorts of belief systems to shine a light on this darkness, this unknowable outcome. We look to the ideas of others about how it’s all going to end. We pick the one that feels right, the one that brings us the most comfort.

This isn’t just philosophy. This matters very much in the real world. If you pursue a basic course in economic theory at any major university, you will eventually dabble in game theory. And when you dabble in game theory you will eventually learn about backwards induction.

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Back in the summer of 2011 I started writing an e-book on Gold. It was called The Gold Bubble: And 6 Other Things Every Investor Needs to Know about Gold.

Gold was making its first run towards $1500/oz and my coworkers were getting tired of hearing me run around the office all day and rant about how gold was in a bubble. So they suggested (politely) that I shut up and write a book about it. Able to take a hint, I retreated to my desk, sketched out a hasty outline, and filled it half way up with about 15,000 words of text.

A few months later I looked up and stopped.

Gold had touched $1,900.

I was spectacularly wrong and there was more important work to be done elsewhere. My coworkers were silent on the matter.

Fast forward 2 years to today, and gold has finally dropped below where it was when I first writing my little Gold Bubble book.

I mention this story not to make me sound stupid or smart, but rather to illustrate how easy it is to be a market prophet. All you have to do is make a prediction. If your goal is to become popular, make it a bold & flashy prediction. If your goal is to be right, make it a cyclical prediction. Then just stick by that prediction. Be loud about it, too. Because eventually you will be right. And when you are right, BE REALLY LOUD ABOUT HOW RIGHT YOU WERE.

It also helps to make a lot of predictions and then just kind of brush the ones you got wrong under the carpet. (We won’t be discussing my interest rate or political predictions today or ever again thankyouverymuch!)

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