The Exponentially Larger Chicken Little
The results for the first week of 2017 in US equities were impressive after a wobbly end of 2016. The S&P 500 ended up +1.66% with Nasdaq 100 up +2.86%. A far cry from the inverse action one year ago.
For those market gurus calling for a major top, crash or zombie apocalypse, it all reminds me of the fable “Chicken Little.” Since this is the year of the Chicken per Chinese folklore, it seems appropriate to examine whether there is some market wisdom lurking within that fable.
Chicken Little panicked when a seed fell on him. He mistakenly concluded that the sky was falling. A classic case of well-intentioned but undue paranoia. It ultimately got his friends he convinced to join him on a road trip to inform the world of his “discovery”, eaten by a tricky fox.
Since the fable was written, things have changed. First, the latest big data algo found that chickens are now twice the size they used to be.Secondly, they are larger still because they use the internet to spread misguided or wrong information.
The takeaway for 2017: Don’t follow gurus like Chicken Little. It can get you killed. Get the facts, be objective (no personal politics), and watch the tape because most likely, large declines will not come from where the crowd is looking. Most importantly, in an environment where fresh data driven by presidential tweets requires quick stepping, maintain flexibility and adaptability.
Ok, so are the bearish market gurus setting up their true believers to get eaten by this strong persistent bull? For the moment, the stock market says yes.
Sentiment indicators such as the VIX continue to signal a total lack of fear. The market approaches irrational exuberance but hasn’t gotten there yet. Key relationships such as stocks versus utilities are still in gear. One of the best recession indicators most correlated to massive selloffs, the 12-month moving average of unemployment data is in excellent shape.