Thursday, February 11, 2010

Financial Valentine’s Day: The Flip Side

In the 1950s, chick flicks were all about falling in love and getting married. And we all know the dark side of love and marriage is divorce. Human emotions run the full gamut through love and light to resentment and darkness. Do these human emotions affect our investments? Contrarians tell us that investors love the stock market at long term cyclical tops and hate it at the bottom. Can we make better investment decisions if we learn to read the market’s emotions?

Yes we can. And the year 2010 has just presented a text-book lesson. The first week of January saw over 50% of investment advisors in love with the stock market, and fewer than 20% shunning her. There had not been so much bullish love and so little bearishness since the stock market top way back in late 2007. Financial love was everywhere.

But the next three weeks featured an investment lover’s quarrel: the Dow Jones Industrial Index dropped almost 9% in 13 trading days: a real heart-stopper for the bullish love crowd. [The cover story was something about PIGS. Apparently Portugal, Ireland, Greece and Spain were experiencing difficulty meeting their debt obligations.] And now, at the end of the sudden short term drop in the stock market, many of the market’s enamoured suitors have changed their minds. Three short weeks ago they thought she was beautiful: now they think she’s ugly.

Valentine’s Day came early this year. But infatuation has turned to distain: 40% of investors now expect the market to correct downward. [Recent Investors’ Intelligence Poll]

The stock market is fickle lover. When we love her the most, she lets us down. And when we love her least, she gives us her best. Now that investors are no longer starry eyed optimists, what can we expect from the stock market?

In my book, Beyond the Bull, I talk about human emotions and their effect on our long term investment performance. In order to invest successfully we have to by-pass our natural human emotions and somehow buy when we feel like selling. We have to embrace her when the others shun her; and we have to leave her when her bullish suitors most love her. It’s called the theory of contrary opinion and it’s the only market rule of thumb that has worked consistently over the years.

So, in three short weeks, investment advisors have fallen out of love with the stock market. It’s Valentine’s Day: it’s time to buy.

At CastleMoore, we have purchased some utility stocks and some energy stocks. Maybe next week, we’ll look at some high tech. But, as always, if she turns against us, we’ll sell out like we did in spring of 2008. It is no longer wise to marry such a fickle lover.

Ken Norquay, CMT
Chief Investment Strategist,
CastleMoore Inc, A portfolio
management company.

Links to Amazon for those interested in Beyond the Bull
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

8 comments:

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