The Crowd is Wrong at Turning Points
Is the crowd always wrong? No. Is it smart to always be a contrarian? Nope.
The truth is that the crowd is usually on the right side for a long time. At least until everyone already knows about it. Once everyone who is bullish has already acted, there eventually comes a point where there isn't anyone left to buy - Pop! Same thing with the opposite extreme. If everyone is bearish on a particular asset, there comes a point where anyone willing to sell has already done so - Bottom!
I spent the beginning of the week putting together a few slides for a presentation we're putting on at Harvard tonight. It turns out that there are so many cool charts and indicators that I could talk to students about that I'm finding it difficult to narrow it down to 30-40 minutes. One particularly interesting slide that I think will stand out is the infamous Magazine Indicator. Obviously sentiment is something I need to bring up and what better way to explain it to these kids than by showing them this:
Popular magazine covers are just one of several things I'll bring up regarding sentiment. But I think this slide makes a good point. The BusinessWeek issue about the Death of Equities came right before the biggest bull market in stocks that we've ever seen. The Fortune cover about the Real Estate Gold Rush came at a time where everyone was a professional House Flipper / Real Estate Speculator. We know how that turned out.
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If you're in the Boston area and can't make the 4 o'clock presentations, we'll be out on the town later in the evening. Ping me if you're around @allstarcharts
Also See:
Robert Shiller on Housing Investor Psychology (April 16, 2012)