The Bearish Bet Is Getting Crowded

People are abandoning the market in droves...

Inflation has soared all year. The Federal Reserve has ratcheted up interest rates to combat it. Since March, the cost of borrowing has soared 3.75%.

If the Fed overdoes it, it could kick off a full-blown recession... And we may be past the point of no return already.

So it's no wonder that most of America is bearish. Just about everyone is bracing for the worst.

But here's the thing... When the news can't get any worse, it doesn't. That's when the market finally hits bottom – and a new rally begins.

Today, we're closer to that point than ever...

Fund managers are predicting a rough 2023.

They said as much in the latest Bank of America Global Fund Manager Survey. This monthly survey looks at the expectations of about 300 money managers around the world.

Most recently, 92% of respondents said they expect "stagflation" in 2023. In other words, they predict a period of high inflation with low economic growth. And to protect themselves, they're bailing out of stocks... Fund manager cash balances are near their highest level since October 2001.

It's not just money managers, though. Consumers are scared too. We can see this in the University of Michigan Consumer Sentiment Index. It shows folks are less optimistic today than they were during the global financial crisis...

Consumers are about as pessimistic as they've been in nearly 40 years.

From Wall Street to Main Street, everyone's expecting the worst. However, the bearish side is turning into the crowded bet today.

We can see that by looking at an important measure from the options market. It's called the "put/call ratio"...

Broadly speaking, traders buy "put options" to make money when the market goes down. And they buy "call options" to make money when the market goes up. If you compare the number of traders betting each way, you can get a sense of the market's mood.

That's why the Chicago Board Options Exchange ("CBOE") tracks the put/call ratio. When the ratio is low, folks are bullish... And when it's high, bearishness rules.

This month, the put/call ratio soared to its highest level in decades. Take a look...

The put/call ratio has only hit this level of bearishness twice before in recorded history.

All this data points in one direction – after a year of bad news, just about everyone is betting against stocks. Folks are bracing for the next leg down. But contrarian investors know this pain is bringing us closer to a turnaround...

At some point, all the bad news stops getting worse... and starts getting better.

This is how bottoms form. A sentiment swing like today's always happens before the next bull market begins.

That doesn't mean we're there yet. It may take a while longer for the bad news to stop. But everyone is bearish today. And that means an incredible buying opportunity is approaching.

Good investing,

Sean Michael Cummings

Further Reading

"Once investors think the world is ending, you don't need things to turn all the way around to 'good' to make a lot of money," Chris Igou explains. Folks just need to realize that doomsday isn't coming. Importantly, we've seen this before... Read more here.

"The majority of the pain has already hammered the markets," Brett Eversole writes. While it isn't time to load up on stocks yet, history suggests the worst declines of this bear market might be behind us... Learn more in Brett's two-part series here and here.