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“The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd; indeed in view of the silliness of the majority of mankind, a widespread belief is more likely to be foolish than sensible.”

- Bertrand Russell, Marriage and Morals

 

The catalyst for for 'Brexit' to surge and the rejection of establishment:

 

  

The Confusion of Crowds - May 27, 2016

 

Much has been written on the wisdom of crowds, as well as the foolishness of them. Polls taken from large groups of people show a surprising accuracy when it comes to guessing numbers or answering specific questions, but these same groups can also become mobs where manias and delusions flourish. A bubble where rumours become beliefs, and beliefs become battle cries.

 

In the world of evaluating markets, most work is based on fundamental facts first. A coffee company may report very good profits, which they will report on their income sheet, for example, but these snapshots don’t always show the trend over time. This is where trend analysis comes in. A picture which shows rising sales and, eventually, a rising stock price, tells a thousand words.

 

A third arrow in the assessment quiver is sentiment. Does the crowd actually like the company and its coffee, or do they just go there because it is the only shop in town? Sentiment can be useful because when too many people are leaning one way, a profitable trade is often to do just the opposite.

 

The American Association of Individual Investors (AAII) asks its members every week how much they like stocks. A rising trend, where more people like stocks every week, is a good confirmation of rising prices. People like stocks that go up, and their buying actions help markets continue to rise. Conversely, people want out when they are fearful, sending prices lower. Sentiment is probably the most fickle of the three assessment measures of stocks, because a crowd’s emotions can turn on a dime.

 

The survey this week was interesting. Consider the world backdrop for a moment. Donald Trump has just secured the nomination for the Republican party in the US, a man who has now proposed the building of not one but three walls (Mexico, Canada, and now Ireland). No one knows what to expect of a presidency under his watch because he likely doesn’t know himself. Britain is considering leaving the European Union, Greece is about to receive its fourth bailout package, and we are as far from peace in the Middle East as we have ever been.

 

Our crazy world with even more turmoil than usual.

 

The AAII survey showed the following:

 

17.8% Bullish investors

52.9% Neutral investors

29.4% Bearish investors

 

17.8% of Bullish retail investors is the lowest level since 2005. It follows a similar survey of institutional investors last week, and was actually lower than the March 2009 bottom. The problem, though, is that the bearish crowd has also fallen. Bearish investors made up 34.1% of the survey a week ago, but fell to 29.4% this week. Those who consider themselves Neutral rose from 46.6% a week ago to 52.9% this week.

 

That's the most extreme print of people basically saying 'I don't know' since 1990,” said commentator Peter Boockvar.

 

Contrarians will argue that investors are actually more bearish than neutral. For example, the past three months have seen $33 billion pulled from US equity funds while $50 billion has been added to bond funds (source: Sentimentrader). The average household is at multi-decade lows in terms of stock ownership and there is close to zero interest in speculative stocks, such as junior golds and biotech’s. Goldman Sachs (NYSE GS), the giant financial firm that loves to make bold calls at the wrong times - oil going to $140 in 2011 (it went to $80), oil going to $20 in February of this year (it went to $50) – just told us to sell our stocks at the beginning of May.

 

The widespread belief, then, is that markets are headed down. So far, though, the crowd has been wrong. Toronto’s S&P/TSX index is up over +3% in the last two weeks and the US S&P 500 is +2%. Not bad for a month we feared. A great deal of money remains on the sidelines, so if news improves – oil holding at $50, Britain voting to stay in the EU – we could see cash pour back into stocks over the summer. Stranger things have happened.

 

The fundamentals remain weak, however, with manufacturing slumping further each month. This suggests to us that this is a short-term bounce but not much more. We remain invested, with the same cautious “I don’t know” stance as the crowd.  

 

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 The Silent Quotient

  Sector Rotation Journal ##

 

Articles, excerpts, commentary and reviews herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned. Readers are cautioned that every idea communicated herein involves risk and uncertainties. Opinions and predictions and may differ materially from actual events or results.

 

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