Readers of this blog along with followers of my media work know that I’m a believer in the contrarian indicators- specifically sentiment indicators. In fact, I wrote a thesis on using sentiment in conjunction with classic technical indicators as my final submission to attain my Chartered Market Technician designation. Sentiment is really a study of human behavior, as it applies to financial markets.
Think about the changes that we’ve seen over the years as investors. In my 26 year history as a stock trader, I started using a “quote machine” for my live stock prices (not as old as the ticker tape machine below, but still, nothing like today’s technology), I used printed sell side (brokerage) and Value Line research, read the morning financial press and subscribed to a mailed chart book service.
Now I have live brokerage research, a large network of live and flowing paid research subscriptions, live interactive charting, live fundamental and quantitative data, and a live news flow that is literally impossible to stay on top of. The internet changed everything – including the speed of trading, increased volume, and expedited market movements.
One thing that will NEVER change is human nature. We are herd followers. As a student of herding behavior on the market, I tend to observe that same tendencies in everyday life. We herd through fashions, auto choices, food types, you name it. For example…
- Have you noticed the pronounced usage of the word “perfect” to acknowledge an affirmative these days? Do you say “perfect” when acknowledging something? This word only became popular a year or so ago, now almost EVERYONE says “perfect” regularly. Most people aren’t even aware they say it. Herd behavior.
- How many pickup trucks are in your neighborhood? Are many of your neighbours roofing contractors and tradespeople? Probably not. 10 years ago—these vehicles were owned by “PANTs” (People Actually Needing Trucks). Now – the herd has migrated into trucks, when a sedan/ wagon would suit their lifestyle and fuel consumption needs better. My neighborhood is filled with airline pilots, accountants, bank employees, lawyers and retired folk who drive unscratched shiny pickup trucks with the bed covered 99% of the time. Young men buy fancy pickups jacked up with big tires. Herd behavior.
- Bumper stickers/t-shirts and car decals saying “Keep calm and whatever on” or those “stick family” decals – nobody had this stuff on their cars 10 years ago.
- Gluten free diets. Atkins diet. Years ago you just ate less and worked out more to get slim, and it worked just fine.
- Tattoo’s. Everyone’s got one (well, I don’t). These were limited to blue collar workers, radicals and prison inmates just a few years ago. Now, you’re unique if you don’t have a tattoo – especially in the under-40 crowd. Herding 101.
Herding is fine with fashions and vehicles, and it’s even ok during a stock or sector’s trend. After all, you need herding to drive a stock up. However, it’s when the herd becomes “too” bullish that we need to be cautious – or if its “too” bearish, we should be looking to buy. Right now, in addition to many of the tools that I study, a unique study presented by www.sentimentrader.com shows that investors have become irrationally pessimistic about the stock market—data taken from the AAII (American Assoc. of Individual Investors) sentiment survey. This herd behavior has indicated market bottoms and tops many times in the past. Here is the chart taken from sentimentrader, with green arrows showing similar pessimism by individual investors in the past – a bullish indicator.
This, and the fruition of the bullish candlestick formation last week, had me buying stocks on Friday and Monday morning –I gave you a heads up on that strategy here. I’ll continue to be legging in on the dips herein.
Keith speaking at the MoneyShow Saturday October 31, 2015 at 3:30pm
Please come out and join me – I really enjoy meeting readers of this blog at my speaking engagements. Here is the link for the details: