Is a rebound near?

WARREN Buffett has said that the time to be greedy is when others are being fearful, and the time to be fearful is when others are being greedy.

Easier said than done, surely, with the way the FBM KLCI has been going.

The month of December has probably tested the resolve of many investors. With rampant margin calls led by many political stocks, it has been a vicious cycle. Stocks just fall, period...regardless of whether it’s good news or bad.

It is no surprise then that sentiment has turned very bearish.

However, is this really a bear? For one, bear markets do not start with so much negativity. They usually start with some enthusiasm, where investors are mostly lulled into thinking the future is pretty steady.

Often times, many investors will be in a state of self-entitlement, having had a few years of positive returns and not foreseeing the bear anywhere ahead. Small declines will not seem foreboding or cause panic. Investors will only realise it when it is too late and they are far too knee deep in it to escape.

Corrections, on the other hand, come when sentiment is already negative and investors are already fearful of some perceived historical issue - be it the trade war or Brexit. Sentiment is already dour. Couple this with volatility, and you get investors proclaiming the beginning of a bear cycle.

It would appear that we are now in this situation.

The FBM KLCI is not just down 7.46% on a year-to-date basis, but sentiment is also bad. Across the globe, indexes and sentiment gauges are down. There is now plenty of talk about cash being king, and we read about large veteran hedge funds exiting the industry as making returns become harder.

With all this pessimism, could this actually be a signal that stocks are poised for a rebound soon?

Volatility cuts both ways. Sharp downswings can quickly turn into sharp upswings. When the rebound happens, again there will be no warning. There will never be a clear-cut signal that the coast is all clear.

As more and more negative news is announced, instead of seeing it as stronger evidence of a bearish cycle, perhaps, it is a sign that the end of the bearishness is near.