Use The “Fear Indicator” To Identify Market Bottoms
Every investor has “the” dream. I know you’ve had it . . . I have it all the time. It’s a little day dream when you drift off in your head. That perfect trade. Selling a stock you own at the peak of the market. It’s a story to brag about. Something to tell the guys at the office. Great fodder for cocktail parties.
There’s another dream investors have as well . . .
It’s taking a position at the absolute bottom. Being the guy who grabbed at the “falling knife” and caught the handle. You put in your buy order and the markets turned on a dime . . . never to look back. 30 seconds after buying a stock you were up, and you’ve been profitable ever since.
Nice dreams. But, I have to be honest. In all my years trading the market, I don’t know anyone who has been able to do both – and do both consistently. Even the greatest investors can’t time the markets perfectly.
Just look at Warren Buffett.
He’s gotten into a number of trades too early. One of the biggest was his purchase of the Washington Post (WPO). He made a huge investment in the company in the early 1970s. What’s really interesting was his timing on the investment. Despite being an investing genius, he didn’t get in at the bottom. Nope. The stock traded lower for several months after his purchase.
Did he get out?
Of course not. Buffet stuck to his convictions and turned a small paper loss into a huge multi-million dollar gain. If your investment strategy is sound, stick to your convictions. You’ll make a lot of money that way.
I’ll admit, in this market, I’m always looking for a sign the market’s at a bottom.
I’ve looked at technical analysis and fundamental analysis . . . both of which I’m sure you’ve used before. However, I’m noticing another indicator is cropping up more and more. The “Fear Indicator” is starting to get noticed.
Never hear of the fear indicator . . . don’t be surprised. It’s not an indicator you can find in the financial tables. You can’t quantify it. But it’s easy to see.
Here’s a great example. A few days ago the Wall Street Journal ran a story about David Ellison, a great money manager. Ellison’s been very successful in his career. He’s been running money for more than 25 years. He started working for Peter Lynch and now finds himself running the show at FBR funds.
I’m not going to bore you with details of his historical performance. I’m not going to name all the awards he’s won or how Morningstar ranks his investing abilities. Believe me it’s good.
What I’m going to point out are his recent actions.
Like they say, actions speak louder than words . . . and what an action he’s taken. In the last few months, he’s moved one of his funds to 50% cash! Yes that’s right 50% cash. As a comparison most funds have 2 to 5% cash. He’s at 50%.
This is a guy who’s paid to manage and invest money. He’s been doing it for 25 years. He’s so afraid of the markets he’s sitting in cash. Not exactly instilling confidence in investors.
This to me is a huge “Fear Indicator”.
It’s like when you see major financial magazines declaring that equities are dead . . . right before one of the biggest bull runs in modern times. This story tells me fear is in the markets . . . and blood is in the streets. And that’s when Buffet likes to buy and when he makes the big money.
I’m not going to call this the bottom of the current bear market . . . but this might be a big sign that we’re nearing one. I’m going to be looking for good bargains to add to my portfolio – as I’m sure Buffet is doing now. I’ll let you know what I find over the coming weeks.
Category: Stocks
