Ten reasons to beware the Bear


I'm wary of both extreme euphoria and gloom because they reflect emotion more than reality. For instance, a mere three weeks ago, the financial media was chock-full of stories warning that the stock market was about to suffer a dramatic decline due to an ominous "head and shoulders" pattern in the S&P 500's chart. Instead of declining, the markets rocketed up for three straight weeks, with the S&P 500 topping out last Friday at 1,010. (For the record, I went long on July 9th and explained my reasoning on my blog, Of Two Minds.com.) So much for widespread gloom being an accurate predictor of stock market action. Rather, such extremes of sentiment are remarkably accurate contrarian indicators.

When gloom and fear are absolutely pervasive, conditions are ripe for a reversal-that is, a stock market rally. Gloom also reigned supreme in the first week of March when the stock market reversed its panic-stricken drop that began in late 2008.