Because if the markets are driven by bullish and bearish sentiments and if you buy at the top when everybody is euphoric and prices are high you will lose, but if you do the opposite of this like we did when everyone was concerned that is the only way to be profitable.
The market is a pendulum. Always swings between optimism and pessimism. We have to sell the optimism and buy the pessimism, but most of retailer traders do the opposite of this. So, we have to check how they work, and we have to do the opposite of that. When they are bears we have to be bullish and when they bulls we have to be flat or bearish. If you want to have a better performance than the crowd, you must do things differently from the crowd. You have to be contrarian and never trust in the consensus because the consensus was the market would go down, but look at the chart now and start to cry on it you traded the short side of the market in the last ten days.
We were long because as John Templeton once reportedly said “Wait till the moment of “maximum pessimism and then pounce”. That is what we did. In May everybody was super pessimistic about any rally. We learned the lesson “When all the experts and forecasts agree – something else is going to happen.”
The public buys the most at the top and the least at the bottom. If you look at this chart below you will find in AAII retail sentiment statistics that typical retail clients were pessimistic since end of April. The bullish attitude was extremely low.
On this other chart you see with the vertical red lines when was the highest pessimism between the public and all these events followed by biggest rallies. At these points the bullish attitude usually was below 30% and bearish sentiment was over 30% or 40%. So, we have to buy only these days at the highest pessimism.
When the pessimism and bullish attitude is under 30% that is a good opportunity to buy the market. Since last week the retail investors are more bullish and got over 30% and started to be more optimistic:
So now we have to cover our long positions and stay flat and more defensive because some correction will come for sure. This AAII weekly sentiment survey is the best short time contrarian indicator which I have ever seen. With this statistic you can easily see the main sentiment of the mass. Forget consensus.
In short the typical public investor buy high and sell low, and repeat the process multiple times. But we have to be contrarian. As most great investors practice something called contrarianism. I know trading against your friends and the consensus from the CNBC is hard, but whoever said being a contrarian was easy? It always feels better buying something that everyone else is buying too.
If it was all wine and roses, anybody could do it.
The BFM Assets Team.
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