The market climbs a wall of worry

Last week, the US investor sentiment, an indicator that is a part of the AAII Sentiment Survey, indicated the percentage of investors surveyed that had a bearish outlook for the stock market. An investor that is bearish believes the stock market will head lower in the next six months.

US Investor Sentiment, % Bearish was at 50.00% for the week ending April 23rd, compared to 42.75% the prior week.

Considering the number of global macroeconomic indicators in uncharted territory, it’s expected to see many investors bearish. But, the stock market is climbing the wall of worry.

When an uptrend in the stock market includes a lot of uncertainty about its sustainability, we say the market is climbing a wall of worry.

That’s exactly what we’re seeing now.

I’m guessing investors who sold their stocks at lower prices are feeling the fear of missing out about now.

I’ve always said that everyone has an exit point, it can be predefined like mine is, or it can be your uncle point. If you reach the point you tap-out to avoid more loss, it’s probably at much lower prices. I prefer to exit before losses get too large, but also exit based on logical price levels that suggest a change of trend. Or, portfolio level exits designed for drawdown control to limit loss.

If you tapped out at lower prices last month because you felt afraid, I don’t know when you would feel better about buying again?

Suppose the chart below represents what you invest in. At what point do you get bullish again and invest?

If you say at the lower level, you may be fooling yourself.

You don’t know it doesn’t go down another -20% from there. But, I know if you tapped out before it was down so much, it is highly unlikely you’ll feel more positive at lower prices. Instead, you’ll extrapolate the recent past into the future.

Just like you are, now.

Except now, prices are trending up, and if you tapped out at the low, you’re feeling the fear of missing out.

So, do you feel better now that prices have risen?

Using the same price series, let’s pretend you sold at the first low.

Then, a few weeks later, the price is trending up and you get excited and buy.

Oops. What you didn’t know, and never will know, is the trend reversed down to an even lower low. What do you do then?

Maybe you sell at the same price level you did before. The market is falling and you just want out, again.

Once if falls a lot more, do you ever get to feeling like buying again? You’ve already created two losses of around -20%, each trip. You first lost -20%, then bought the high, then lost about -20% again in the same price range. Now, here you are, the market is down over -60% and you’re supposed to feel good?

I doubt it.

The headlines are blood red.

It seems everyone is taking on heavy losses and the waterfall has been so deep and long it doesn’t seem it will ever end.

Then, there it goes.


You want to buy every time it moves up 10% and you feel like you’re really missing out on the opportunity of a lifetime when it trends up 20%, without you.

But you’re stuck. So afraid of “another leg down” as everyone is worried about.

Every decline seems to be the beginning of a new leg down, but it isn’t, until it is, but even then, it’s “only” -30%.

I used the trend as an example, but it’s a real trend. I successfully made tactical trading decisions through it, so I know the mindset and behavioral challenges. It wasn’t an ON/OFF switch, either. I entered and exited many times, trading the swings along the way, never sure if it would trend higher, or reverse back down, but applying systems that account for the unknowable outcome.

The market climbs a wall of worry. Fortunately, we’re participating in this uptrend.

It doesn’t do what we expect it to sometimes.

Some investors seem to oscillate between the fear of missing out and the fear of losing money.

Some of them tend to be more afraid, so they are oriented toward the fear of losing money.

Others are optimists, so while they may panic out, they quickly get optimistic after prices trend back up.

Regardless of the behavioral tendency, if you tap out at the lows, I don’t know when you’ll ever get back in. I have no answer for it.

If you buy now, you may exposure yourself to the possibility of loss just as it reverses back down again.

If you wait for the next leg down, what if it never comes?

To me, the solution is to avoid investment programs that may result in your tapping out to start with. That is, know your true risk tolerance. Know at what % loss you are prone to tap out, and invest with a manager who has drawdown controls to help manage the risk.

If you are sitting there in cash, waiting to reinvest, there will never be a perfect time to do it.

Invest with someone who can hedge and manage risk, then let it rip.

The next AAII investor sentiment survey is out tomorrow. It will show fewer bearish investors, now that price has trended up.

Nothing changes investor sentiment the a price trend.

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

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