What Do You Think?


Original article here.
By Al Thomas

What do you think about your car, your house, your job, your credit card and the stocks you own or don’t own in your 401K?

How you and several million others both here and in the world care about those things is important. There are companies and governments that keep track of mass opinions.

On radio and TV we hear of opinion polls for just about everything from who has the best tasting diet drink to who may be the next president.

In markets there are many sentiment indicators. These are part of technical analysis. Every exchange member is aware of many of these indexes. As a former floor trader the over bought/oversold indicator was a basic pasrt of all my trades.

These traders are called Contrarians. The percentage of bullishness is reflected in a number usually referred to as the RSI, the Relative Strength Index. It is not a single index that signals a buy or sell, but a warning flag that there are too many bulls or too many bears.

Suppose an investor was in the peach pit market (there isn’t any such thing) and it is believed there is a shortage of peach pits to make ice cream. The ice cream makers kept bidding up the price for peach pits and the investor owned a carload of peach pits he had paid 40 cents per pound. The market went up every week and was now at 80 cents per pound. Everyone was excited about peach pits and wanted to buy more. The crowd thought the price was going to $1.50. The RSI sentiment was over 90%.

As a Contrarian I think how many people are left that will pay this high price? Using other indicators the professional trader will want to sell and get short. I have seen it happen many times. The fools are trapped at the top and rush for the exit. That is why bear markets go down about three times faster that bull markets go up.

The stock market sentiment is inverse to the long term price movement. By that it has the most positive opinion at the top just before it breaks and heads down and after it hits bottom no one wants to buy it.

All successful traders are Contrarians. They sell at the top and buy at the bottom. There are very few who are good at it. You will find economists are the worst.

To be a Contrarian you must “think outside the box”. You can’t go with th crowd. Most successful trading methods deviate from standard methods that Wall Street promotes. Finding a broker or financial planner that does is very difficult.

When shopping for one ask to see his exemplary account statement during bear periods such as 2000-03 and 2008. If he hems and haws hang up and go to the next call.

When I give advice like this you can see why brokers hate me.

Become an original thinker. It is your money.

Al Thomas’ new book, “If It Doesn’t Go Up, Don’t Buy It!”, 3rd edition, has helped thousands of people make money and keep their profits with his simple 2-step method. The method made 10% during 2008. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know. Copyright 2010 Williamsburg Investment Co. All rights reserved.