Certainty, Uncertainty, And The Paradox

Zero Hedge reported (via Bloomberg) that the S&P 500 is the "richest" relative to Wall Street analysts' mean year-end estimates since the May high, and that this year has seen the market "rich" to strategist forecasts by the most in the last 10 years.

This is classic over reaching by investors. Morningstar just reported that estimated U.S. mutual fund asset flows for October 2013 were at their highest monthly inflow since January. Bob Prechter's latest Elliott Wave Theorist noted that inflows to domestic equity mutual funds in the 2nd week of October were the highest in seven years, including the 2007 top.

The S&P still needs a higher high in my opinion, but it's lining up to be a terminal one. The VIX still seems to be the safest course of action at this time, as the market has fooled us many times since 2009. But overall sentiment as measured by AAII, Investors Intelligence, and the Daily Sentiment Index are all sky high. Volatility is low because no one wants protection. Puts are cheap because no one wants them.

With inflows into equity funds at their highest in seven years, investors have once again coped with uncertainty by waiting until they are absolutely certain that the trend is real -- a sure thing -- only to jump in as it is likely ending.

Trading and investing is about taking action in spite of uncertainty, when the odds are in your favor. The odds of additional new highs shrink substantially when sentiment is high. They are at their highest when sentiment is low. This is the paradox of the market. This is what makes the market, because so few can bring themselves to act in such an environment. It's not easy, but it can do done.

A proportional move in the S&P could take it to 1804-1815, possibly as high as 1821.Hopefully the VIX will get below 12.