The stock market got hammered last week and investors are asking “why.” All they really need to do is look around and notice how many folks have jumped on board. Sentiment has never been this lopsided.
Ultimately, when investors position themselves in such a lopsided fashion you don’t need any other reason for stocks to selloff. Goldman:
The downward bias for S&P 500 may continue based on our Sentiment Indicator, which shows institutional clients hold high net long futures positions and implies negative returns over the 4-8 week period starting late December when it initially breached 90. It now stands at 82. (via Business Insider)
In other words, everyone’s long stocks so there is no marginal buyer left to push prices higher. Didier Sornette does a fine job explaining how this can lead to a crash:
The underlying cause of the crash will be found in the preceding months and years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translated into accelerating ascent of the market price (the bubble). According to this ‘critical’ point of view, the specific manner by which prices collapsed is not the most important problem: a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. In this sense, the true cause of a crash could be termed a systemic instability. (via John Hussman)
“Systemic instability” is simply a fancy way of saying the market became overloaded just like the camel and the proverbial final straw. When everyone has already hopped on the back of the stock market it may only take one more buy order to ‘break its back’/form a top.
Investors should ask themselves, “when everyone’s already bought, who’s left to push prices higher? And who’s left to support prices when they fall?”