Use The "Fear Indicator" To Identify Market Bottoms
The Dynamic Wealth Report
July 30, 2008
Is This A Sign Of A Market Bottom?
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.
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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.
• Corn ($5.94 per bushel)
Corn prices jumped this week on heavy end-user buying and threats of a
heat wave in the midwest. Despite the increase, the commodity is
trading about $2 below its all time high price reached earlier this
year.
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