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Net Net: Promoting innovation and managing change

Don't panic till the last of the bears throws in the towel

Not seeing a bubble: Jeff Cox

The other day I was having lunch with a friend from college who made a lot of money during the financial crisis by shorting stocks.

Not John Paulson money, of course. He was focused on equities, when the real money was in fancier derivatives. But enough that someone prone to occasionally confuse success in financial markets with wisdom would consider him a very wise man.

He ordered a burger with Swiss cheese and drank tap water. I had the tuna sandwich and something stronger than tap water.

"I hope you didn't listen to me the last time we met," he said. "I wish I hadn't listened to me."

The last time we had seen each other was back in late April or early May—I forget exactly. He was absolutely terrified by the performance of the equities markets.

Don Farrall | Photodisc | Getty Images

He had a litany of things—such as the sequester, declining home affordability, diminishing returns from quantitative easing, and tax hikes—he believed would hurt earnings and deliver a blow to stock prices. And we were already up around 15 to 16 percent across all the indexes.

(Read more: Oppenheimer has a wild 2014 market prediction)

"Unless this is going to be the best year in the history of the stock market, I can't see any more room for upside. Which means the risk is all downside," he had told me.

His advice at the time was to get out of stocks altogether.

Seven months later, the Dow, the , and the Nasdaq indexes are all higher now than when we had that conversation. The Nasdaq, which had lagged earlier in the year, has lately been on fire. It's up better than 30 percent year to date.

By the ordinary rules of logic and rationality, my friend should now be even more bearish than ever before. None of the fundamentals have improved by very much. The outlook for next year or even the year after that isn't brighter than it was back in May.

But the ordinary rules of logic don't always apply in financial markets. My friend is bullish. He thinks stocks will keep going up for quite some time.

(Read more: Cramer: 3-D stock the poster boy for overvalue?)

There will be corrections, but these will be followed by rallies that bring us back past the earlier highs.

"It's like Soros says, market prices always distort fundamentals. It's not that they don't reflect fundamentals—they actually change and distort the fundamentals. We're in a distortionary bull market," he said.

My friend isn't alone in throwing in the bearish towel. Hugh Hendry, one of the world's brightest hedge fund managers, recently told investors that he was no longer bearish. And his reasoning was very similar—the market had beaten the bear out of him.

(Read more: Stocks 'very overpriced' and so what?)

Reformed Broker (aka, Fast Money's Josh Brown) quotes Hendry:

I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out.

I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time.

I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.

If you are anything like me, this kind of talk sets off contrarian alarm bells. This is what a capitulation of the bears sounds like. Everyone gives up and jumps on the trend—which means that the trend has got to be just about over.

Hendry even recognizes this, saying that "I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say 'sell.'"

So why isn't the market crashing?

Another guy usually regarded as a market bear has a theory.

David Rosenberg of Gluskin Sheff recently wrote in a note that everyone is really bearish because everyone thinks their neighbor is bullish. Which produces a kind of double-negative, contrary-contrarian result. The contrarian bearishness has become a kind of hidden consensus, which means that the market keeps moving up.

(Read more: The tech wreck's huge toll on fund investors)

Capitulations like that of Hendry and my friend only reinforce this impression. The bears are going bullish, which is a sell signal. But if everyone is seeing sell-signals, that's a buy signal.

We've actually been in this place all year long. Way back in January, my buddy Jeff Cox was writing about the capitulation of the bears.

It's a fit of reflexivity gone wild.

This really upsets some people. Herb Greenberg, now writing over at, recently almost blew a gasket watching Jim Cramer on television.

What he said in a rapid-fire segment on CNBC's "Squawk on the Street" (and I'm paraphrasing): Forget the fundamentals, the crummy earnings quality, the business model concerns -- all of that kind of stuff short-sellers talk about. All that really matters is that "Green Mountain is selling Keurigs" and that "Herbalife is generating cash flow" and that the "hedge funds short it are only talking their books, so best to ignore them."

What he said on-air, though, resonated to everything many of us are feeling right now about this market. Forget about whether it is undervalued, fairly valued or overvalued, based on whichever metrics you want to use.

All that matters is the direction of stock, which makes this the best of times for opportunistic traders, the worst of times for those who are not, especially those who dare tilt against the herd.

I know that nobody respects the fundamentals more than he does. But I also know that he'll overlook them if he believes, at a point in time, nobody cares about them.

Thats where we are (once again!) in this market.

And it's a magical point, where rigor and discipline are trumped by the trade, the story and the stock.

Herb ends with a warning: "Buyer, more than ever, beware."

So Herb at least hasn't yet capitulated. Which, according to the laws of contrarian reflexivity, may mean that the market still has some upside. But if Herb ever throws in the towel, run.

—By CNBC's John Carney. Follow him on Twitter @Carney