A friend and I went to lunch the other day. I wore a bow tie—having just learned the art of tying a bow tie over the holidays (no clip-on for me, thankyou!). The waitress commented that she doesn’t see men wearing bow ties – it was different. My friend, who has known me from a business perspective for many years, replied “This guy does everything differently!”. My associate Craig Aucoin has often mentioned that he views my entire life’s philosophy as that of contrarianism.
If you’ve been following this blog for a few years, or have read either of my books – you will know that I appreciate the art of contrary investment thinking. I’ve always believed that (forgive my cynicism here…) the crowd, or majority of people, typically follow others mindlessly without much independent thought in most things in life. While such herd behavior may be fine for fashion or automotive design (I do like the skinny suit trend!!), it’s not so great for outperforming the stock market.
The best way to utilize contrary thinking within the investment world is through sentiment indicators. The basic premises of sentiment indicators is that – when most investors are bullish, you should start selling. If the majority are bearish, back up the truck and load it with stocks. You can improve sentiment indicators by monitoring two distinct groups. You can monitor the movements of groups of investors who are usually correct in their decisions (“Smart money”) and those groups who are usually incorrect decision makers (“Dumb money”). So if commercial hedgers and pension fund managers are usually right—you want to follow those investors—do what they do. Conversely, you want to fade, or trade against, the decisions made by typically inaccurate retail mutual fund investors, small speculators and small options traders.
The best website to follow sentiment readings is www.sentimentrader.com. I’ve been a subscriber for years. Jason Goepfert tracks smart vs. dumb money groups. He noted in a report last week that we have an unusual situation at the present. Usually, you get extreme optimism in one group coinciding with pessimism in the other group. This makes sense. Optimistic dumb people buy high, and they need pessimistic smart people to sell those shares to them. And visa-versa. However, right now we have a high reading of optimism in BOTH groups. Smart and dumb folk alike are bullish.
Jason’s chart below might paint a picture for us. The chart shows the current stats: 60% of the smart money surveyed are bullish and 65% of the dumb money surveyed are bullish. Put together (125%), this shows an optimism level that has typically proceeded corrections.
I believe that this tool suggests a pending correction may occur quite soon after the seasonal period of strength ends. As noted on my last blog (https://www.valuetrend.ca/?p=3472) – the technicals are trumping all else right now. But some background warnings signs of diverging momentum and contrarian sentiment studies suggest that the party may come to an abrupt halt in just a few months.
For the time being, I continue to enjoy the market trend through common stock participation. Make hay while the sun shines, as they say
Learn Technical Analysis – includes market and sector analysis for 2015!
I’ll be conducting a free technical analysis workshop at the Richview Toronto Public Library: 1806 Islington Ave, Toronto, ON M9P 3N3 – January 14, 2015 @ 7:00 PM. This may be my last library seminar for the winter, so if you live in the area – Come out and join the discussion!