This is the most-read article in the Wall Street Journal today:
“Americans are Really, Really Bullish on Stocks”
They are piling into stocks as major indexes reach new highs and placing bets that the rally that has driven the S&P 500 up 18% this year has more room to run.
The surging stock market has minted millionaires and helped send many Americans’ net worth sharply higher. As of the second quarter, the number of 401(k) retirement accounts at Fidelity Investments worth at least $1 million reached around 497,000, according to the firm. That is up 31% from a year ago and a record high.
U.S. households’ stock allocations have steadily inched up this year, according to JPMorgan estimates, and recently accounted for around 42% of their total financial assets. That is the most on record in data going back to 1952.”
Here is a chart that corresponds with that idea:
You will notice the dot.com peak in 1999 and the 2008 peak, just as the Great Financial Crisis (GFC) hit.
Of course, a good contrarian investor buys when the herd hates the market and is selling (2001, 2009, 2020) and sells when the herd loves the market and keeps piling in.
Wall Street has done a very good job over the last 10 years conditioning people to just buy an index fund and ignore it. One day you will wake up rich, they say. The good news is that this theory has been true for the past 15 years. And it is certainly better than not investing at all.
The problem is that a market is made up of people. And people are stupid. They will do the same thing again and again well past the point where it stops working.
I’m old enough to remember when the Dogs of the Dow worked. Someone did the research and backtested the system and it consistently beat the S&P 500. For those that don’t know, the Dogs of the Dow is simply buying the four most oversold, highest dividend stocks on the Dow Jones Industrial Average at the start of a calendar year.
The system stopped working as soon as too many people started buying it. Over the past five years, the Dow Industrials Dividend (DJD) ETF went up 35% while the S&P 500 went up 90%.
We see the market throw change-ups all the time. Trees don’t grow to the sky and all good investing trends come to an end, whether it be the nifty-fifty in the 1960s, gold in the 1970s or S&P 500 funds today.
The problem is that when everyone knows that you should just buy the S&P 500 for the great bull market, it has generally already passed. When the bull market runs out of buyers the only people left are sellers.
One way contrarian investors can spot a top or a bottom is a thing called the “magazine cover indicator” which says the cover story on the major business magazines, like The Economist, Businessweek, or Forbes, is a contrary indicator.
A famous example is a 1979 cover of Businessweek titled “The Death of Equities.” The 1970s showed poor performance in stocks, with big moves in gold and silver.
However, in retrospect, going all in on stocks in 1980 was the best-timed buy of the next two decades. The Dow went from 800 to 14,000.
In other words, when the mainstream financial media proclaims something unknowable as a fact, you should bet the other way.
By the time it hits the magazines, the idea has run its course. Think of it as the financial equivalent of the Madden curse, where whichever NFL star graces the cover of the John Madden Football game always has a bad season.
That said, the magazine indicator as a contrarian indicator actually works. In 2016, Gregory Marks and Brent Donnelly of Citigroup looked at the Economist and “selected 44 cover images from between 1998 and 2016 that seemed to make an optimistic or pessimistic point.”
They found that impactful covers with a strong visual bias tended to be an accurate contrarian indicator 68% of the time after one year.
To be a profitable trader, you buy fear and sell greed. It seems to me the market is greedy right now, while equity valuation is at an all-time high.
That scares me enough that I am selling equities and buying cash.
All the best,
Christian DeHaemer
Outsider Club
https://www.outsiderclub.com/going-nucular-in-ghana/
https://www.outsiderclub.com/learn-to-code-they-said/
https://www.outsiderclub.com/nvidias-hypergrowth-is-over/
