When risk is unanimously perceived by flock traders to be at the highest level, such as it is now, it is actually at its lowest. In contrast, when risk is perceived by this group to be lowest, it is at the highest level. This odd phenomenon is called “sell low and buy high” and it is driven by human emotions, not market indicators. It occurs when the human sense of survival takes over from logic.
Whenever there has been a sharp decline in the equity markets, such as the case during the recent trading days, nearly all investors conclude it will go on indefinitely and can get even worse.
Once everybody perceives that it has become dangerous to invest, then the potential gain relative to the risk increases dramatically. The opposite also happens at market tops. However, it is less striking because fear is a much more powerful emotion than excitement of a rally.
History has proven over and over that the most popular investments end up with the worst performers, but investors just want to do what everybody else does. Being a leader is a lonely and yet often very profitable position.
When we at ETF Trade Advisor started opening long positions during August of 2011 and June of 2012, the investors where running for the exit doors. You make your profit by buying low and being patient. Remember the quote from Warren Buffet? “What the wise man does in the beginning, fools do in the end.”
The oversold commodity ETFs are all leading the market now. They are just waking up. The semiconductors SMH, which is a leading market indicator ETF, actually closed higher on October 23, when Dow closed down almost 2%. This bullish signal will go unnoticed by an average investor or media. Keep your eyes daily on our member’s page for updates.