The Crowd Is Right Within A Trend, Wrong At Turning Points

Everyone wants to be a contrarian nowadays.  I'm of the opinion that if the market is trending lower it is only natural for investors to feel bearish. It's human nature.  What you want to look for is for sentiment to be at an extreme.  But, more importantly note that a contrarian approach works better in the stock market when you are looking for a bottom than when you are looking for a top.

Currently, the market is in a downtrend, the natural feeling for most investors is to feel bearish. Those who suffered significant losses after the 2000 top and the 2008 debacle will probably feel more bearish than most, again all natural.  What we want to do is look for extreme readings and or wait until the underlying instrument (market) starts trending up.  The crowd is right within the trend, wrong at turning points.

“The art of contrary thinking consists in training your mind to ruminate in directions opposite to general public opinions; BUT WEIGH YOUR CONCLUSIONS IN THE LIGHT OF CURRENT EVENTS AND CURRENT MANIFESTATIONS OF HUMAN BEHAVIOR”–Humphrey B. Neill

“The contrary theory is a way of thinking but lets not overweigh it.  It is more of an antidote to general forecasting than a system for forecasting”.-Humphrey B. Neill

People think differently today from the way they did, say, prior to 1929; that is, prior to the Great Depression and the New Deal.  WHEN YOU STOP TO THINK OF THE MILLIONS OF YOUNG PEOPLE WHOSE JUDGMENTS AND PERSPECTIVES IN LIFE HAVE ACTUALLY BEEN FORMED SINCE THE ADVENT OF THE NEW DEAL”.-Humphrey B. Neill

You can take the above statement and apply it to the Millenials and their parents.

Being a contrarian is not just going against the crowd just to go against it, especially if the underlying instrument is moving in the same direction as the crowd thinking.  If the underlying instrument (market) is trending higher, close to its 52 week high, investors are betting against it, the media is bashing it, then that is a worthy contrarian play.

“One of the most important tenets of our Expectational Analysis^® approach is that the power of a contrarian indicator is much greater when the underlying sentiment runs counter to the direction of the stock. For example, pessimism would be an expected reaction to a down trending market and would therefore not be a valuable contrary indicator. On the other hand, skepticism in a rising market is a powerfully bullish combination, as market tops are not seen until optimism reaches extreme levels”.–Schaeffer Research

The SP500 made very little progress for eight months (Novermber 2014-July 2015) then it plunged 12% from high to low in a few days.  Should investors feel exuberant about that or perhaps a little skittish maybe even slightly bearish?

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fzorrilla@zorcapital.com   @Zortrades