…As investors, our job now is to be selling off our investments to those “greater fools” that are willing to overpay for an asset…Currently, at 3 standard deviations above the 60-day moving average, the “Donald Trump Is Great” rally is likely complete as opposite extremes have now been reached.
The comments above and below are excerpts from an article by Lance Roberts (RealInvestmentAdvice.com) which has been edited ([ ]) and abridged (…) to provide a fast & easy read.
Take a look at the composite bullish sentiment chart below which is a compilation of individual and professional investors. (AAII, INVI, MarketVane, and NAAIM)
Typically, when sentiment has been this “bullish” markets have been near short to intermediate-term peaks, or worse. We can also examine investor behavior by looking at fund flows of individuals over time. Not surprisingly, investors tend to buy the most near market peaks and sell the most near market bottoms.
Since investors are mostly individuals that have a “day job,” the majority of their “research” comes from a daily dose of media headlines. Therefore, since the media tends to “focus” their attention on “market moving headlines,” either bullish or bearish, investors tend to “react” accordingly.
During market declines, investors tend to panic and sell out of stocks with the majority of the selling occurring near the lows. Conversely, as the markets begin to rally from deeply oversold conditions, investors continue to sell as they disbelieve the rally and are just happy to be getting some of their money back. However, as the rally continues to advance, investors are “lured” back in as the “greed factor” overtakes their logic. Unfortunately, this buying always tends to occur at, or near, market peaks.
I have used the analogy many times in the past the market is like a rubber band. During bullish trends, the market can get stretched to extremes from the moving average for a short period of time before it snaps back.
The “Greater Fool” Theory
As investors, our job now is to be selling off our investments to those “greater fools” that are willing to overpay for an asset…Currently, at 3 standard deviations above the 60-day moving average, the “Donald Trump Is Great” rally is likely complete as opposite extremes have now been reached.
This is not something seen just recently, but at the peak and trough of every correction over time. The market is pushing extremes rarely seen at the beginning of a next “leg higher” in the markets.
Just remember that we have been here before – both on the way up and the way down. More importantly, as I stated this past weekend: “First, “record levels” of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a “record level” is reached it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution. The 4-panel chart below suggests that current levels should be a sign of caution rather than exuberance.”
As markets advance in price, the risk of investing money, or rather the potential for loss, grows. Here is my point. With markets trading at extremes, bullish exuberance at peaks and monetary policy tightening – this might be a good time to locate one of those “greater fools” to sell to…