…the last bear capitulates. This is the flip side of the more commonly heard “the market doesn’t bottom until the last bull capitulates.”
Yes, this is folk wisdom. But the idea behind it is sound, I think. The implicit question behind both is where new buying/selling is going to come from to drive the market higher/lower after the final bull/bear changes his mind.
After all, once the last bear surrenders and reorients his portfolio from its previous defensive posture to offensive, where is fresh money going to come from to drive stocks higher? In the same vein, once the final bull concedes he’s been wrong and reorients to a defensive posture, where is new buying of bearish stocks going to come from?
I mention this now because the last big domestic equity bear, Morgan Stanley, just changed its view from seeing the S&P 500 falling by 15% over the next year to the index being flattish. The firm’s CIO is more precise than that, forecasting a 1.5% rise in the index over the coming 12 months.
After accurately predicting the S&P’s fall in the first ten months of 2022, MS called for continued declines in 2023. The market, as measured by the S&P, is up by close to 40% since December 2022, however, and the NASDAQ up by about 60%. Hence, I imagine, the change of heart.
Once MS and die-hard fans make portfolio shifts, and given the strong advance since October 2022, it becomes more difficult to make the case for further large market gains, I think. But sideways for a while wouldn’t be such a bad outcome. If so, stock selection rather than reading the overall market trend becomes the key to outperformance.