If you listen to the bears, they’d have you believe this market is teetering on the edge of a cliff.
And as usual, they have a simple explanation.
But here’s the problem…that ‘simple explanation’ seems to change week by week.
On one level, we can sympathise.
When you’ve been consistently wrong over a long period — as the stubborn bears in this market have been for the past few years — you tend to clutch at anything that can explain away your wrongness.
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When one bearish theory is disproven and its forecast fails, the bears just try another one.
That’s why the ‘bear points’ that make up so much of this market’s white noise have become a bit of a grab bag.
But we can’t empathise with pundits who insist on continuing to be wrong — regardless of what reason they choose this week.
Because with your wealth at risk, the stakes are too high…
This week, the bears are running from an old story.
It’s Tuesday and Wednesday’s US Federal Reserve policy meeting.
That’s the meeting where the ‘great and powerful’ members of the Federal Open Markets Committee (FOMC) meet to decide the direction they want to push the markets.
The bears are worried about the potential outcomes of this week’s Fed meeting.
They seem to think that if the Fed ends its current round of bond buying this week, the price of government bonds will collapse and the stock market will melt down.
Anyone who accepts that view must have a limited understanding of the way markets work.
Players in any market — whether it’s for stocks, bonds, cocoa beans or fish — don’t set prices based on what’s happened in the past.
Traders take their positions based on how they expect the future to shape up.
If, over the course of several months or years, everybody slowly comes to expect a good thing to end — the price impact of that change will spread across a long period.
That has happened over the past 18 months with the Federal Reserve’s money-printing program.
In May last year, the markets freaked out when the Fed announced its intention to buy slightly fewer bonds each month.
You might remember that ‘taper tantrum’. You might even have recognised what a great buying opportunity it was.
Since the bears threw their toys out of the pram in May and June last year, the S&P/ASX 200 [ASX:XJO] has returned as much as 21%. You can see that in this chart from the start of April 2013 to the present day.
Over that period, the Fed has slowly but deliberately made it obvious to the market that its bond buying program would run down to zero in 2014.
It matters little whether the Fed announces the end of bond purchases this week or at its next meeting in December.
Here’s the point: The smart traders have already priced it in.
That means when the Fed makes this announcement, it won’t send the markets into meltdown.
In fact, it might even push stocks up.
It only takes a basic understanding of how markets work to see why…
The most bearish players in this market have sold stocks that they don’t own.
They’ve borrowed the stocks to do this. It’s called short-selling.
They’ve done this in anticipation of a cataclysmic market crash that they think might happen because of something the entire market already understands —i.e. the end of money-printing.
When the US Federal Reserve makes that announcement and the market doesn’t collapse, the bears will quickly realise that they’ve been wrong.
They’ll scramble to buy stocks so they can return them to the owners who enabled their short selling.
We call that scramble a ‘short squeeze’. It usually has a rapid, powerful, positive impact on stock prices.
We’re not necessarily forecasting a short squeeze when the Fed stops buying bonds.
For that to happen, all the bears in the market would have to throw up their hands, say ‘I was wrong’ and reverse their trades.
And as we’ve seen, some bears insist on staying wrong for long periods.
But when reality disproves yet another bearish theory, stocks tend to go up.
And when that happens, you don’t need a PhD in finance to figure out which stocks go up fastest…
How you can benefit
We’ve written before about how you can think about market sentiment as a giant pendulum.
It’s free to swing in any direction…but right now, the bears are doing their best to push it towards the red.
And the factors conspiring against one sector in particular have pushed this pendulum almost as far as it will go.
We’re talking about the Aussie resources sector.
All it will take is for investors to hate this sector just a little less.
Then the ‘resources pendulum’ will swing back into the green. That could bring fast, outsized gains to nimble profit-hunters.
We’ve never seen a better time to consider the potential of carefully selected resource stocks.
So it’s timely that our Resources Analyst, Jason Stevenson, has just picked four of the best and most underappreciated energy stocks on the Aussie market.
Sentiment towards this hated sector will improve. When the bears realise the sky won’t fall in when the Fed makes a statement that the whole market already sees coming, that improvement could come sooner than you think.
That makes now a great time to consider investing in unloved stocks.
Cheers,
Tim Dohrmann+
Editor, Money Morning
The post The Bears Hate This Market… Here’s How You Could Profit appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
