Expert Says: “FOMO Is Back”

I understand the stock market behaves as a discounting mechanism, pricing in future expectations rather than current conditions. However, if you had asked me last Monday, when the banking crisis was unfolding, where I would have placed my bets, it wouldn’t be that the market would be higher, let alone enjoying one of best weeks in two months. Yet, here we are with SPDR S&P 500 (SPY) and Invesco QQQ Trust (QQQ) up 3.8% and 6.9% over the past five trading sessions.

The view of the market seems particularly forward looking given the issues surrounding banks are far from resolved, as well as one of the most uncertain and potentially impactful FOMC decisions still in front of us.

So what is driving what can only be viewed as undue optimism?

According to Wylie Tollette, Chief Investment Officer of Franklin Templeton Investment Solutions, it is the return of Fear Of Missing Out (FOMO). However, this time around it is not retail investors chasing pie in sky momentum stocks, but large institutions reloading on large cap blue chip companies.

As Tollete wrote in a report, “bank failures and the threat of recession are no longer the greatest fears of all money managers, it’s missing out on the next big rally. If you miss the start of the rally, you miss the bulk of the returns. It’s very difficult to catch up if you miss the first week or two. Sometimes it’s just days.”

Basically, he thinks an impending slowdown in the United States and global economies will prompt central banks to switch back to looser monetary policies, triggering a renewed surge higher in the markets.

I have my own, less sanguine, opinion… but that’s what makes a market.

On the one hand, this bullish thesis does lead me to explore how longer-term investors, who shouldn’t get too opinionated, should approach the current environment.

There is a major school of thought among the buy and hold crowd that trying to time the market is futile and will lead to underperforming.

One of the linchpins of this stance is “don’t miss the 10 best days” argument.

It goes like this: If you missed the 10 best days of each year over the past 20 years your returns would be less than half if you just held on.

The graph below shows if you missed the 10 best days each year since 2002 your annualized returns would be a mere 2.63% compared to 9.52% to buy and hold.

The counter argument is if you can manage to miss the 10 worst days of each year your annualized returns would be 11.2%.

Both of these scenarios seem to fall under the quote, “There are three kinds of lies: Lies, Damned Lies, and Statistics.”

In real life, people have different risk tolerances, different time frames, and different objectives.

My personal belief is one can, and should, make quality decisions regarding how much exposure to have at any given time. Call it market timing if you want, but I consider it simply being smart about risk management.

The buy and hold argument, regarding missing the 10 best days, ignores that the largest rallies come within bear markets. As such, the 10 best and worst days are rare occurrences and tend to be clustered within a relatively short time frame. Meaning, you are catching short-term rallies within a longer-term downtrend.

This happens because volatility increases significantly in bear markets due to investor psychology, amplifying emotions.

As a fairly active trader who uses options to capture relatively short-term price swings, I don’t really have a horse in this race. However, knowing the sentiment and the forces that drive price action helps me identify opportunities.

At the moment, I have no case of FOMO. In fact, Options360 is positioning for some very bad days in the coming months.