One of the biggest traps for the smart investor or trader is the often persuasive commentary about recent market action.
When the Dow had a decline of over 1% last June, we highlighted this problem, calling it the biggest mistake of the individual investor. As background, readers should go back and look at that article, written when the Dow was under 11,000. The road was a little rocky for another month, but we all know how it turned out.
What about now?
Today's Barron's had a number of interesting insights into current sentiment. Let us first look at this comment from The Trader column:
"We're at the point in the mature cycle where we all know excesses have been built up, and everyone is watching for signs that point to the end of the cycle [emphasis added]," says Jeffrey Kleintop, chief-market strategist at LPL Financial. "The market's perspective will get even more short-term from here, and the bull will be a rougher ride."
Our sense is that this is an accurate reflection of many hot-money managers, trying to time the end of "the cycle." Timing this cycle has been going on for three years, spurred by skepticism about Fed policy. It began with the gradual increase in interest rates from an abnormally low rate. These guys are shorter than they want to be and reacting to every data point. Readers might wish to compare this behavior with that described in our Blackjack article.
Contrast this with Warren Buffett's advice: "You can't get rich with a weather vane."
Barron's also has an excellent article by Michael Santoli called The Missing Man. Santoli provides a lot of information about how individual investors have not yet participated in a rising market. Readers should check out the entire article, but here are some key quotes:
Net inflows into stock mutual funds have been a trickle for most of the past few years, in many months turning into outflows. This is true even if one includes the money added to hugely popular exchange-traded funds. The Bank Credit Analyst, a research firm, points out that household-equity positions as a percentage of broad money-supply measures have been stagnant since 2004, and are on par with levels from 1995 or 1996, despite today's significantly lower interest rates.
That is actual data about the individual investor, not speculation about sentiment.
Richard Russell, the longtime market commentator and editor of Dow Theory Forecasts, described this situation in a note to his newsletter subscribers last week. "True, the little guy may be skeptical, he may be wringing his hands over the housing situation or the price of a dinner at his favorite restaurant or the cost of gasoline," he said. "But somehow the big picture, the stock-market boom, has eluded him. That will not last. The little guy will not forever resist the lure of the bull market. It's a question of timing."
Scott Rothbort, writing for RealMoney, the paid service of TheStreet.com and worth it, (full disclosure: We now write for RealMoney, although regular readers know we have consistently endorsed this source) has an excellent article where he cites a new interest in the market within his circle of contacts.
We are very far from a top as measured by individual investor participation. Check it out by looking at a typical CNBC commercial from the bubble era, Stuart teaching his boss to trade online.
Also from the anecdotal-evidence file, in the week when the Dow first touched 14,000, the prominent ad space on the back cover of Barron's shouted, "Short. And Simple," in highlighting the ProShares ETFs that let investors bet against the market.
So we also have individual investors now empowered to short the market based upon "feel" and what they read in the continual pounding from bearish Internet sources. In another Barron's article Michael Santoli writes about bullish market predictions at the year's start as follows:
Those were consensus calls among the standard sell-side and long-only investment pros at the start of the year -- not, mind you, among the many wised-up, blog-scraping, doom-inviting macro bears out there who can tell you how many homeowners defaulted on their mortgages in DeKalb County, Ga. last week, but not why the Dow hasn't collapsed.
It is another case where the "smart investor" reading a lot of Internet information could make a big mistake. The question is where to look and how to interpret what one reads. Our next installment in this series will cover investment blogs and how to interpret them.