When nearly everyone is warning about a crash, is it time to start buying stocks instead?
You might think so. Savvy investors hate too much company. It's an old saw that the time to invest is when the rest of the world is running for cover.
And right now, a contrarian can find plenty of perversely bullish signs.
Talk has been growing all summer of a crash. Even Tony Robbins has joined in. Yes, that Tony Robbins. The self-help guy. The one who walks on hot coals.
And we've been hearing about increasingly ominous signals of impending doom embedded in the stock market charts: the Hindenburg Omen; the Death Cross; Elliott Waves.
And then there's the Voodoo Necklace.
(OK, I made up that last one. But go ahead and panic anyway. Aaaarrrrggghhhh! The Voodoo Necklace!)
Just about everyone you meet seems to be talking about a double dip in the economy. Almost no one wants to hear about stocks. Ordinary investors have been taking money out of equity mutual funds for two years, the conventional wisdom holds, and pouring the money into bonds.
So is all this a contrarian buy signal? Is this the time to invest?
Hardly. When you look below the surface, the picture's nowhere near so clear.
First, "everyone" isn't really out of the stock market. They're just talking like that.
According to the Investment Company Institute, a mutual fund trade association, the public still has more than twice as much invested in stock market funds as it does in bond funds. It has more in equity funds than in bond and money market funds combined. So much for a bond mania.
Even if ordinary members of the public are gloomy, their portfolio managers often aren't. They're sticking to the modern portfolio theory's formula that worked so well during the bull market: "Shares outperform; you can't time the market, so always stay fully invested."
Furthermore, if "everyone" were preparing for a crash, short-sellers -- speculators who bet on falling share prices -- would already be out in force. But they are missing in action. The percentage of stocks sold short is well below the levels seen two years ago.
And there's a second problem with trying to bet against the doomsayers.
Despite all the talk, even after a decade-long bear market, the stock market today still isn't cheap.
Sure, some will tell you it is.
"Stocks are dramatically cheap," Chris Hyzy, the chief investment officer at U.S. Trust, told CNBC recently. "You're talking five or six decades cheap in terms of their value."
Really?
The current shtick on Wall Street today is to say shares are cheap in relation to forecast company profits, the so-called price-to-earnings ratio. Today, the P/E on the market is about 12. In other words, share prices are 12 times forecast earnings. By historical standards, that sounds pretty low. The average has been about 15.
But the numbers should be treated with caution.
Continued: Earnings forecasts are unreliable
