Optimism has run amok.

There is an old saying that states the following, "The stock market climbs a wall of worry". There is a world of wisdom behind that statement. Every time during past periods of unrealistic optimism by the following suspects, economist, government, money managers, and pundits on television or print. We have had a problem.

Consider that over the past several months Mutual Fund Managers, Hedge Fund Managers and generally money managers of all type have become extremely optimistic with their funds. Managers vote their optimism with money invested in their funds. There are numerous studies that suggest when money managers vote by being fully invested, the action alone has signaled a market top.

Examples of past market tops were as follows. January 2000, October 2007, March 2010. These periods all have one thing in common, money managers have reduced their cash holdings to less than 4%. What followed the first two periods was significant stock market declines lasting for several years. We may be at the top of the next significant decline. Time will tell?

Consider the following observation. The markets are the collective wisdom of all its players, that are at any one time collectively optimistic or pessimistic. As we know from many studies about human nature, we tend to move in lockstep if there is extreme optimism or pessimism. Or described in another way when we have greed or fear. The pendulum always swings too far in one direction or the other.

Our so-called professionals are influenced by the collective so-called wisdom of the masses. Consider the following example. The Federal Reserve Bank has demonstrated throughout its existence the uncanny ability to raise interest rates right before major stock market declines. Examples would be 1929, 1987 and 2000 for instance. And of course the resent discount rate hike to .75%. The latter hike was of course not at the same magnitude as the other examples given, but nonetheless it was a hike during a period of very high unemployment, unprecedented government involvement in business and in social programs, and generally a period of extreme uncertainty.

Much of my recent observations are data dependent. And although I am not completely ready to call the top today. It is clear to me that we do not have a competent government in place to handle the current situation. The credit crisis that began in 2007 has not completed its devastation throughout our economy. There are too many countries, states and local governments spending beyond their means. None of this is sustainable, and the markets will anticipate future problems before it becomes obvious to the casual observers. Much more to come on this topic.

To our clients rest assured, we are prepared to take action in either direction of the market.

What do you think?