Most people are followers rather than leaders. When a huge majority believes something, the market has a habit of doing the opposite. Sophisticated and experienced traders, as well as top corporate insiders, continuously trade in the opposite direction of the general public. And often they have a very high batting average in their trades, yielding handsome profits. They know very well that following the crowd can be detrimental to making money.
The most important approach to trading is to do the opposite of any hyped up market. Remember October 3-4, 2011. You may recall the atmosphere of fear and despair at that juncture when we at ETF Trade Advisor kept insisting on buying the equities at extreme lows. That was when fund investors and flock traders were piling up into cash and Treasuries, clearly the turning point in the market.
Also be very aware of media hype and the flavor of the day articles. This noteworthy article was published on May.05.2012 by Mary Anne & Pamela Aden: “The stock market is looking good.”
The timing of the above article encouraged readers to invest at the top. This could not have been worse advice at the peak of equity prices with no room to go up higher, as you have noticed since May 05, 2012. Investors should be ever so careful with media articles. We were shocked to see this article issued, when VIX was at a dangerously low level, indicating complacency and no room for a rally to continue as well prior heavy insider selling during the months of March and April.
You may also recall the Aden sisters publishing the following article on January.03.2012: “In the New Year Stick to Safety.”
Following this recommendation, the investor would have completely missed the rally that started in October and intensified in February 2012. We were fully invested and anticipating a powerful rally which caught everybody by surprise.
On January.03.2012 Very few people were able to overcome their emotions and do the opposite of their friends and family. But that is precisely what they should be doing. Otherwise they end up buying high and selling low.
Equities worldwide are still laboring under the heavy load of being too popular with average investors and traders. As the bear market progresses, we will experience repeated extended declines. Once too many investors finally have succumbed to the idea that downtrend will continue indefinitely, that will be the time to start buying equities again.