Every successful advisor, and investor, will tell you that becoming emotionally attached to your portfolio is a mistake. The reasons are obvious and easily understood.
What many do not realize is that someone else’s emotions affect your portfolio even more than your own, how so? The performance of stocks as a whole is a reflection of the investing masses’ emotions. Stocks go up, because the majority of the composite body of investors decided to buy and vice versa.
Interesting though, the composite body of investors tends to be wrong. This is a strong statement, so let’s analyze it further.
Investors were generally bullish in October 2007, in fact sentiment indicators reached extremely optimistic levels. What was the result? The S&P 500 (SPY) and other indexes dropped more than 50 percent. Mutual fund managers – the pros – got it wrong too. Mutual fund’s asset levels where at an all-time low of 3.5 percent. This means that 96.5 percent of mutual fund assets got to participate in the decline.
In the recent past, try to recall the atmosphere surrounding the March lows. Hardly anybody was talking about a market bottom, even though it was imminent. Ironically – and representative of the media’s lack of perception – the Wall Street Journal publish on article titled, “Dow 5,000? There’s a case for it” on March 9th, the day the market bottomed.
Investors who get swept up by this kind of crowd behavior, are usually the ones that buy high and sell low. Investors who use this fascination human ritual and use it as a contrarian indicator tend to be the one that profit.
Judging by the optimistic outlook and euphoria sparked by recent earnings reports, a market top is not far away. After all, new bull markets climb a wall of worry; they don’t ascent an escalator of hope. The bearish case is supported by indicators with a track record of historic accuracy.
Unless those indicators give a green light, the market is simply not ready for a sustainable rally. The ETF Profit Strategy Newsletter, one of the few newsletters that called the March market bottom (on March 2nd), provides a detailed analysis of historic indicators along with studies of investor sentiment.
The result: This rally is doomed to fail. New lows are on the horizon. The current enthusiasm for stocks will soon separated many investors from their financial dreams. Detailed target areas for the ultimate market bottom and top of this rally are provided in the most recent issue.