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Kaminsky's Call: Why Stocks Will Trade Higher in 2011

I was chatting with my good friend Glen over the weekend when he casually asked me a question.

"What do you think is worse for a PM (portfolio manager)?" he mused. "Sitting on your hands in 2008, watching your portfolio hemorrhage half its value? Or putting yourself 100 percent in cash this year—only to watch everyone else make money?"

I'll let you in on a little secret: answer this question definitively, and you will have determined the direction of the equity market in the first half of 2011. And that's what I'm about to do for you.

I had an inkling of what the most common answer might be, but as always, I needed to do some due diligence before formulating my thesis. So I asked around - and first on my list was Dr. Doug Hirschhorn, trading psychology coach and author of the book "8 Ways to Great."

Hands down, he said, sitting on the sidelines during a rally would cause the greatest emotional distress.

"The fear of missing out is much more powerful than the fear those investors experienced in 2008," he explained.

"When traders get beaten by the market—as most of them did in '08—they want to take revenge, naturally. So for those entirely in cash this year, imagine how personally they must be taking it—they intentionally didn't get into stocks, so they feel it's all their fault."

With the psychology down, it was time to head to the Street.

Next up: Thomas J. Lee, Chief U.S. Equity Strategist at JP Morgan.

"When the market was melting in 2008," he told me, "everybody got zapped, so there was safety in numbers. Today, though, there's a bifurcation in the market of bulls vs. bears. For those on the sidelines, their 3-year performance numbers are probably already awful, so missing the rise in the tape is likely inexcusable and therefore scarier."

There seemed to be a pattern forming in these answers. I finished my rounds by talking with Brian Belski, Chief Investment Strategist at Oppenheimer Asset Management. His answer was blunt.

"You never like to lose money," he said. "But in 2008, everyone lost money. If you're in cash this year, and you missed the rally, it could cost you your job."

There you have it - everyone agrees that sitting alone on the sidelines in 2010 is much worse than losing your shirt along with everyone else in 2008.

But what does it mean for the market and your money?

Simply put: take the self-loathing these PMs feel for having missed out, add the fear of continuing to miss out—and, worse, losing their jobs—and you've got a recipe for a rising stock market in the first half of 2011.

Who knew self-hatred was such a great leading indicator?


Watch Gary Kaminsky weekdays at Noon ET on CNBC's "The Strategy Session."

DISCLOSURE:
Gary Kaminsky does not hold any equity positions.

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