Mark today on your calendar because it could be the most important day of the year.
This week the S&P/ASX 200 hit the highest mark since mid-2011.
And since the stock market hit the low for the year in June, stocks have rallied 14.4%. And according to the major housing indices, house prices have flattened and started to rise.
The reaction has been predictable…and yet surprising.
The usual stock market bulls have called the start of a new bull run — that’s predictable. But what has surprised us (although it shouldn’t) is the speed with which supposed contrarian commentators have flipped sides.
We guess it’s the herd mentality. When it comes down to it, most people are just too dog-scared to stand out from the crowd. They want to fit in.
You’ve probably figured out by now that we’re never in a rush to fit in anywhere. Besides, while the mainstream gets excited about China GDP, US employment numbers, and the latest Eurozone bailout, we’ll stick with the one market barometer that hasn’t failed us yet.
We’ll explain more below…
Renowned investor John Templeton is famous for buying 100 shares of 104 companies in 1939 that were trading for $1 or less. As the story goes, 34 of those companies were in bankruptcy.
Why would Templeton make those trades?
He had a simple view on buying stocks. When the stock market reaches the ‘point of maximum pessimism’, that told him it was the time to buy.
We take the same view with one of the most accurate stock market indicators we’ve seen in nearly 20 years. Only we’re not looking at market pessimism. And we’re not even looking at a group of investors.
We’re looking at the pessimism of one man…who happens to sit a few metres from us staring at a bank of trading screens.
We’re talking about our in-house trading guru, Murray Dawes.
If you’ve seen Murray’s work you’ll know he’s a naturally bearish trader. That doesn’t mean he only short sells, because he doesn’t. He buys stocks too.
But he’s really in his element when he spots a false break-out at the top of a distribution…sorry, we’ll skip the jargon. In short, when he sees the charts setting up for a short-selling opportunity, it’s like a light switches on inside his head. He shifts from a point of maximum pessimism to whirlwind of clicking and typing as he rushes to get the trades out.
Farewell to the Fair-Weather Bears
You see, for John Templeton he saw the point of maximum pessimism when the stock market had crashed and when the world was on the verge of war. At that point, few people could have imagined that stock prices would ever go up again.
But for Murray, as a short-seller, the point of maximum pessimism happens at a different point in the stock market cycle. It’s when the stock market has hit a new high point. It’s when the perma-bulls say stocks are going to the moon, and it’s when the fair-weather bears switch sides, fearing they’ve missed out and not wanting to miss out on more gains.
That’s the herd mentality we mentioned earlier.
But as we say, we don’t care much for joining herds. Not when our stock barometer yesterday reached his ‘point of maximum pessimism’…
The last time I saw Murray this pessimistic about the stock market (that is, the stock market had hit a high point) was on the 25th of April, 2012.
At that point the stock market had gained nearly 10% in seven weeks. And once again the bulls were chattering, and again the part-time bears had switched sides.
We were this close to putting our arm around the big fella and telling him to keep his chin up.
The next day, the barometer had changed and we didn’t need to worry about consoling him. By the end of the day he had sent out five short trades and while the stock market had turned from sunshine to gloom, Murray had gone the opposite way.
Four weeks later, the stock market had fallen 10.3%.
We saw the same attitude from Murray yesterday before we left the office. It seemed like he didn’t know where the next trade was coming from. Yet as we write this note, we see the same feverish activity that we saw six months ago.
There’s only one way to sum him up; he’s like some sort of brooding genius.
Stock investors have gotten cocky. The stock market has rallied strong and investors believe this run will continue. Maybe it will, but based on what we can see, it’s nothing more than a false dawn.
You see the same behaviour from the housing bulls. House prices have fallen, and now that they’ve plateaued for a couple of months, the bulls have gotten cocky, and the supposed bears think this is the end of the housing crash.
Are they kidding? The housing crash isn’t even half over.
But it’s at this time when you discover the true contrarian investors. Over the past four years, there have been a whole bunch of people who didn’t see the crisis coming and yet jumped on board after the fact, claiming they predicted it all.
And now, having failed to predict the crash, they think they can predict the next rally. Good luck. It just goes to show they’ve got no idea about how markets and economies work.
We’ve got one thing to say about those people — they’re fools. For them it’s more important to be a respectable commentator and get on the TV and in the big papers, than it is to offer genuine analysis and advice (analysis the mainstream won’t screen or print).
They’re the types who believe the front page of today’s Australian Financial Review makes sense:
‘The federal Treasury is relying on a jump in the construction of houses, apartments and office buildings to keep the economy ticking over as iron ore, coal and other commodity export prices fall more sharply than it expected and investments in resource projects peak earlier than forecast.’
To call that ‘clown analysis’ is generous.
But it gives you a clue about the kind of economic nonsense and false hope that’s keeping the market going. Only after the exposure of these ridiculous fallacies will the markets truly reflect the Aussie economy.
To sum up, go ahead and buy a portfolio-full of shares if you want to…follow the herd. But we’ll stick with our stock market barometer, who has a canny knack for picking these stock market tops.
PS. Murray has just sent out a couple of trades and we expect him to send out a swag more in the next few days. You can take a test-drive of Murray’s service here…
From the Port Phillip Publishing Library
How to Make Money from the End of the Mining Boom
An Australian Property Boom and Bust all at Once
A Back-Door Way to Invest in the Electric Car Industry
Pursuit of Happiness: Why it’s OK to Smoke, Drink and Play Frisbee
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.