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Contrary Opinion and the Fear Factor

Stock-Markets / Stock Markets 2010 Nov 13, 2010 - 07:14 AM GMT

By: Submissions

Stock-Markets Best Financial Markets Analysis ArticleWink Twyman writes: Last week, I turned on CNBC in the early morning hours. Anchor Sue Herera was in a bubbly mood. She said that, after the market’s performance that week, one commentator said, “You ain’t seen nothing yet!” Because I am jaded on media coverage, I immediately took Herera’s cheerleading as a signal that the top was close at hand. It occurred to me that the average investor and trader might take Herera’s words to heart, rush out to Scottrade or Charles Schwab, and plunk down their hard-earned money on “black,” I mean, the stock of their choice because the market was now safe.

The purpose of this essay is to show that it is never safe when commentators say, “You ain’t seen nothing yet!” In fact, this is often the worst possible time to buy stocks. Never buy giddiness or veiled hints that the best is yet to come. Oftentimes, while you are buying stage right, the pros are selling stage left.

The famous trader, Jesse Livermore, remarked that he was often tasked with the job of marking up stocks for sale to the retail public. The public never seemed interested in low prices. But once a stock started to move, the level of interest from amateurs would increase proportionately. It was understood behind the scenes that the insiders were already in. They were using the increase in prices to scale out of their positions. Now, the oddest point Livermore noticed was that the retail public would continue to buy on the way down! Apparently, hope springs external. The average guy would always hope that the next drop down was support and that this support would hold. Of course, there is no such thing as support in a Bear Market.

Livermore never knew CNBC. He died in the 1940s. But he would have recognized the game that was going on last week. Some things are timeless.

Nicholas Darvas was a Las Vegas dancer who stumbled into investing and trading during the 1950s. I love the Darvas story because he had the persistence and determination to figure out the system on his own. Davas candidly wrote about his early days when he sought out stock tips and “financial advice sheets.” The commentators were always excited about the market. They urged readers to “Buy this stock now before it is too late!” And guess what? Darvas would rush out to buy the recommended stocks. The stocks took that as a signal to drift lower and lower. The pattern never changed. Eventually, Darvas woke up and opened his eyes. He realized that “when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.”

It did not pay to be late to the party.

Gary Smith is another example of an average guy who read the papers and treaded water. For years, Smith wanted to succeed as a trader more than anything in the world. He worked tirelessly. He read The Wall Street Journal. He read Barron’s. He was influenced by the news of the moment. And still he went nowhere as a trader for sixteen years. It was only when he discovered contrary opinion did he turn himself around as a trader. Learning to ignore The Wall Street Journal, for example, was his saving grace.

These are just a few examples of contrary opinion. There are many, many stories out there in the wild and woolly world of financial markets. The take away point is that buying should be at a point of fear, not warm and fuzzy feelings or the urgings of commentators.

Consider that one of the best times to buy the S&P 500 Index this year was August 25, 2010. On that date, I urged my fellow investors in the Las Vegas Thrift Savings Plan (TSP) to move 100% of their retirement funds from the G Fund (essentially a cash position) to the C Fund (a diversified portfolio of stocks). I remember that day well. There was no giddiness from Herera on CNBC. No media commentators were crowing that “You ain’t seen nothing yet!” During my lunch stroll along the harbor, I saw the newspaper headlines proclaiming that the stock market had suffered a series of setbacks. When I saw that bearish headline, I knew my call to move 100% into stocks was the right call.

What were retail investors and traders worried about during the last week in August? They were worried about a developing Head and Shoulders pattern on the Index, (on no!), the Hindenburg Omen (oh dear!), and the Grand Cardinal Cross (oh my!). Most of all, there was fear in the air. Even I was fearful on the morning of August 27 as the S&P 500 Index dipped below 1040 and I was Bullish!!!

Ultimately, it is always a good time to buy when the fear factor has gripped the hearts and minds of Bulls, Bears, and the “Get Me the Hell Out of Dodge” Crowd. That’s how money is made. That’s how winning is done. Buy the fear.

I leave you with a post to my Thrift Savings Plan (TSP) blog:

Saturday, November 6, 2010
What a Week!
This week, the market blew through resistance @ 1219 and set a new high for the year. The market's reaction to the Federal Reserve announcement was very bullish. So, I am a Bull for now.

Is this a good time to buy? No.

Even if the character of the market has changed, it doesn't pay to just buy any old time. Prices are high right now. People are excited. It is always a better move to Buy Low, not Buy High. Prices are most tempting when prices are high. But how many times have retail investors purchased a stock because of excitement and then watch the prices drift lower and drift lower?

What are good times to buy and add to the C Fund?

First, you want to buy fear. You want a situation when investors are fearful and on edge about the future. That is not the case now. Euphoria reigns.

Second, you want to buy at support levels. In other words, find a level on the S&P 500 Index where the price made a previous low and that low held. Why? Its about psychology. The investors and traders at the greatest risk are those who bought the breakout of the S&P above 1219, the former high for the year. I think prices are going higher but there is no demonstrated support yet @ 1219. 1219 must be tested. Next week will be important in this regard. The low this week was 1177. 1177 seems like a natural support for me. Should the S&P 500 drift down to 1177, you can count on two forces. Everyone who bought in a rush this week will be underwater and experiencing anxiety and fear. You will also have the opposing force of patient investors and traders waiting to ride the next move up. Waiting for support allows us to benefit from these two opposing forces.

Third, it doesn't pay over the long run to buy when technical indicators are crazed. The Relative Strength Index (RSI) closed at around 78. That's abnormal for an entire index and not sustainable over the long run. The volume this week was not strong enough to support a breakout. According to famous investor William O'Neil, a breakout above resistance should be supported by at least 50% more volume than the previous 50-day moving average in volume. I ran some calculations Thursday night. I was shocked to find that the volume was paltry despite appearances on the surface.

In summary, I am a Bull now. The market is telling me that prices will be heading higher. The market is also telling me that I would be sorry if I bought now. The temptation is oh so great. That's greed. Let's put greed aside. Patience and discipline are better allies. Next week is a new week. Mutual Fund Monday should be up. But the rest of the week will be more instructive.

Prices never go to the moon. Nor do they drop to the center of the earth. We buy when folks fear the drop to the center of the earth.

Wink Twyman is a private investor and trader with fourteen years of market experience. His best technical campaigns have been the decisions to move to cash before the 2008 Crash, his call of the March 2009 bottom, and his decision to stay in cash before the 2010 Flash Crash. He is a graduate of Harvard Law School and the University of Virginia with High Honors. Wink’s Las Vegas Thrift Savings Plan (TSP) Investment Club is up 12% for the year 2010, even though the S&P 500 Index is only up 7.5% for the year 2010 as of the market close November 12, 2010. Check out his blog:

Wink is not a registered financial adviser. This information is for educational purposes only. He cannot assume responsibility for your investment decisions and results. Please consult a professional financial adviser before making a financial decision. This essay is not a solicitation or offer to buy or sell any stocks, futures, options, or commodities.

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