“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude” John Templeton
Years ago Leslie Nelson did a movie called “Naked gun: The smell of fear”. If you like slapstick comedy, you may enjoy it.
Human beings, like most other mammals, are pre programmed to be able to identify fear. This, apparently, occurs through pheromones – picked up by our olfactory senses. There has been some academia written on the subject, as covered here. I wonder if this “pheromone” sensor we all posses is helping give us get the sense of the fear on the stock markets right now. I don’t know about you guys, but I sense that there are some stressed investors out there.
Another way of detecting fear is to watch how the more emotional investors are reacting to the current market. You can measure this quantitatively. For example – we can look at sentimentrader’ s “Smart money/ Dumb money” spread. I’ve posted their smart/dumb confidence spread chart here in the past. Below is the newest reading, which shows us we are clearly in the “buy” zone for that indicator. For the record, 61% of smart investors (pensions, commercial hedgers, etc) are confident. Only 26% of the dummies (retail investors, mutual fund buyers, small board lots etc) are confident. The smell of fear is high amongst the dumb investors. And that’s bullish.
Another sign of investor fear is the VIX. In fact, the nickname for this measurement of option premiums is “the fear index”. Doesn’t get much clearer than that, does it?
The VIX rises when premiums rise on options. Premiums rise because investors are pricing in a likelihood of greater price swings. I noted in my last Bear-o-meter report in early October that the VIX had dropped below 12.
That low score indicates a lack of fear (i.e. low option premiums—low volatility anticipated by options traders). The chart below shows us that the VIX recently spiked to almost 25, and is currently sitting just under 20. You will note that 20 is my first level of “overly pessimistic” emotions by market participants. And that is a bullish sign
One should not take one or two indicators as the go-ahead to execute a trade. However, there is mounting evidence that we are really, really close to a buying point. I’ll do a full Bear-o-meter report in a week or so. That will give us a bigger perspective and hopefully a better risk/reward signal if the coast is likely clear to buy. Until then, we should be anticipating that the current correction is nearing its point of climax. I would expect a buying opportunity is coming soon. Can you smell that opportunity?