Money-Making Market Lessons

A comparison of investor sentiment and stock market tops-and-bottoms shows that the investing masses are often wrong. For example, cash reserves of mutual fund managers reached an all-time low of 3.5 percent right before the stock markets all-time high. That means that 96.5 percent of mutual fund assets participated in the markets melt down.

The CBOE Put/Call Ratio is often used as contrarian indicator as it reflects investor’s fear. High levels of fear tend to define a market bottom and vice versa.

Lesson Three: Know who to trust

The market’s 50 percent drop surprised most investment gurus and money managers (such as Legg Mason’s Bill Miller) who had risen to pop star like popularity. Even Warren Buffett had to endure criticism.

In an investment environment where everything is in flux, reliable guidance can only be gained from indicators with a historic track record of accuracy.

Those indicators point to lower levels once this rally exhausts itself. (A detailed analysis of the most reliable set of indicators is available in the March issue of the ETF Profit Strategy Newsletter.)