The Sound of Silence

The insightful investor develops solid indicators and then follows the data.

This may seem obvious, but instead….

Many pundits start with the conclusion and then search for evidence.


[For complete appreciation of today’s post, follow the links for the relevant music.]

There are a number of interesting current examples. In various prior posts I have suggested that these were not really important leading indicators, so I am not flip-flopping by drawing inferences from improved conditions. Others will do that via their silence. I suggest that you recall the scary recent warnings on these themes – now all showing improvement – and note the sound of silence:


  1. Margin debt. Remember how you were supposed to be scared witless (TM OldProf) by this event? It appeared at the same time as prior market tops. There was no evidence that it reflected borrowing for long trades rather than short ones. There was no evidence that it was a leading indicator. Those who scared you with these charts are not likely to inform you that margin debt has declined. (See WSJ).
  2. Divergences. Remember how this signaled that the market was about to crash? Before that the small cap rally was frothy. Today’s market action put the Bomp back into biotech and the small caps. This means that the worrisome divergences (shown as not so worrisome here) have been reduced. This means that some will revert to the “frothy” argument while most of us should just ignore the whole matter.
  3. Sentiment. Remember when you saw weekly chart updates on how bullish sentiment was. That was a contrarian indicator since it supposedly showed that no one was left to buy. This was always a stupid uninformed argument since data consistently showed that most investors were 50% in cash – scared witless. I wrote about this a year ago, and the post is worth revisiting. It explains why you should focus on fundamentals of risk and reward.

This list could be longer and suggestions are most welcome. There are always market worries (remember the “cockroach theory” about Europe? The Cyprus “crisis”? How a single small country (Belarus) was going to destroy the European recovery by voting against a reform? The insightful investor embraces the opportunity presented. (More detail on the concept in this post, which some have graciously suggested was my most helpful. At the time I wrote this, many commenters thought I was crazy).

A Fearless Forecast

As you read your investment news tomorrow you will not hear about the positive changes noted above. Expect instead to see the stories shift to some new source of concern, something that will generate advertising revenue. One of the Tyler Durdens will find a new omen or something to worry about. And of course there are the reliable mainstays of bashing the Fed about money printing and how it will all end badly. It is time for someone to develop an algorithm on that one, since it reliably shows a lack of anything meaningful for pundits to discuss!

If you really want to achieve investment success, you need a forward-looking approach you need to “See Clearly Now.”

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  • Paul Stern/@scalperpaul May 23, 2014  

    “It ain’t over ’til it’s over.”

    It is always ‘almost over!’

    ‘Til it ain’t!’

  • Rob Martorana May 24, 2014  


    Excellent point about confirmation bias, and the silence that ensues.

    The musical references are much appreciated, though now I feel every one of my 51 years. I shall have to listen to New Order and The Alarm during my morning workout to counteract the creeping stodginess.

    Now back to business…

    I would add cash to your list of indicators. Tom Roseen of Lipper has repeatedly noted that it is better to watch cash, rather than focus endlessly on signs of a “great rotation” from bonds into stocks. Thus far in 2014, there are signs that cash is coming into the market:

    Here is Tom’s comment from May 21:

    “Once again, money market funds suffered the only net redemptions of the super-groups—to the tune of $57.8 billion—for their fourth consecutive month of net outflows. For the fourth month in a row mutual fund investors were net purchasers of fixed income funds, injecting a net $9.2 billion, and for the sixteenth consecutive month investors remained net purchasers of stock & mixed-asset funds, depositing a net $17.4 billion for April.”

    Bottom line: When $58 billion comes off the sidelines from money market funds, what do we hear in the media? The Sound of Silence.

    Thanks for another great post.

    Source of Lipper quote: