Posted by on June 4, 2014

Wall Street is Depressed … and that is a good thing.

Barrons.com today ran an article worth reading in my opinion. It observes that pessimism among market strategists is at the highest levels since the market lows of 2009. The full article can be found here.

The idea is if consensus opinion reaches an extreme, it is a signal to go the other way. If everyone is bullish it is time to sell, conversely if market strategists are bearish, it is time to be buying stocks and going long. Merrill Lynch calls this the “Sell Side Consensus Indicator” and last month this read 51.3 down for a 2nd straight month and even lower than March of 2009 when the stock market hit the lows from the financial crisis. The historical average for this indicator is between 60 and 65%.

The real puzzle to me is the conflicting signals investors have to digest currently. The sentiment is pessimistic and Bond yields have fallen seemingly indicating a desire for a flight to safety toward bonds, but the VIX is bouncing near historically low levels and the stock market S&P 500 index and Dow Industrials are at all-time highs.

The article finishes with a bullish long call option strategy which would profit from a market advance. Given the low levels of option volatility with the VIX in the 11 handle, premiums are less expensive now than they have been for some time. Contrarian investors can consider using call options to express their bullish sentiment to gain hedged exposure with less capital than straight stock or ETF purchases. The idea has a lot of merit, but when utilizing the Long Stock replacement call strategy, you may want to consider using ITM call options rather than At or Out of the money calls. The overall price is higher, using ITM options, but the extrinsic portion of that premium will be lower. You will establish a lower upside break-even point thereby creating a higher probability of success. With any long option strategy, your risk is 100% of your investment and the extrinsic option premium does have time decay (Theta). Learn all the benefits and risks of this strategy by viewing our archived webinar on Long Calls.  You can find that presentation here.

Run counter to the crowd!

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