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Decoding the “Pain Trade” Phenomenon

April 22, 2023

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The Enigma of Stock Market Resilience in 2023: Decoding the “Pain Trade” Phenomenon

Are you puzzled by the stock market’s continuous rise in the face of geopolitical unrest, a small-scale banking crisis, and the shadow of an impending recession? You’re not alone.

The pain trade is highly evident in current market behavior. Photo by Burak The Weekender.

This intriguing resilience can be attributed to a market principle called the “pain trade.” Tom Essaye, the founder of Sevens Report Research, explains that the market aims to “inflict maximum pain on the largest number of people.” No doubt many of us have felt the truth of this in our own lives.

But what does it mean? Simply put, when the majority of investors have a bearish outlook, stocks will climb. Conversely, when most people are bullish, the opposite occurs and stock values decrease. This well-established pattern is what led to Warren Buffet’s famous advice: When other people get scared, get greedy.

Pain’s Role in driving fear and Greed

Throughout 2023, the pain trade has been the driving force behind stocks, maintaining their upward trajectory despite uncertain fundamentals. Several measures of investor sentiment reflect this phenomenon.

For example, a month ago, the CNN Fear and Greed Index dipped into “fear” territory, while the AAII’s Bulls/Bears Sentiment Index plummeted to -28%, a level often viewed as a contrarian buy signal. Additionally, the Investors Intelligence Advisor Sentiment Survey dropped to 12.5%, indicating a cautious approach.

However, all the anticipated market disasters have yet to unfold, contributing to the endurance of the stock market. As a result, investors who were waiting for a downturn have ended up chasing stocks as they continue to rise. This is evident in the S&P 500’s 7.7% increase since its low point in March and the Dow Jones Industrial Average’s 2% growth in April.

Currently, sentiment is improving not just in the U.S., but across global markets. The CNN Fear and Greed Index has climbed back into “greed territory,” while the AAII Bulls/Bears reading has shifted to a more “neutral” position.

The fear and greed index is pointing to greed. Photo by Jonathan Borba.

Despite all of these improvements, current sentiment levels do not yet suggest a reversal toward a declining stock market. But experts do suggest that the dip is coming. The forthcoming earnings season, with Q1 2023 corporate earnings reports and future guidance, will be crucial in reconciling market resilience with investor skepticism.

What implications does the pain trade phenomenon hold for alternative asset investors?

It highlights the importance of comprehending market sentiment and its impact on investment strategies. As investor sentiment evolves, opportunities for alternative investments that might have been previously disregarded during periods of extreme pessimism or optimism may emerge. Opportunity is everywhere.

Overall, the pain trade phenomenon underscores the significance of diversification in your portfolio. In this context, investing in Merchant Cash Advances (MCAs) on the Supervest platform could present an attractive potential hedge for when the stock market does eventually dip.

Take heed of the pain trade and look out for opportunities. Photo by Anete Lusina.

MCAs offer a unique alternative investment option that is typically uncorrelated with the broader stock market. By allocating a portion of your investment capital to alternative assets like MCAs, you can potentially mitigate some of the risks associated with market volatility and potential downturns, while also capitalizing on the attractive returns offered by this alternative asset class.

You can ask for a free demonstration of how our platform works here.

In the end, diversification is key to financial success

By embracing a balanced approach and including a wide range of asset classes in your portfolios, you can position yourself for success in various market scenarios, ensuring you are well-prepared for any shifts in market sentiment.

You can get started with MCA investing here, where our team can give you a full demo and walkthrough of the Supervest platform.

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