no time were animals tested in the use of this
“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
Our crazy world
with even more turmoil than usual.
The AAII survey
showed the following:
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%
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
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.
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.