How Fear Can Cost You a Fortune

“Once you start down the dark path, forever will it dominate your destiny, consume you it will.” - Yoda

At the end of last week, I searched for all the celebratory articles about the new all-time highs we reached.

In the words of Yoda: “Find one, I did not.”

In fact, the closest I was able to get to good thoughts was in the comments section of a story talking about bearish sentiment.  

I took a full screen shot for you:

Oh, the horror, eh?

Fear, and the dark pathway that it “Hansel and Gretels” you down isn’t easy to see at first. It simply becomes part of your landscape.

You get lost in it until every indicator – positive or negative – means something bad is going to happen in the markets. And you say to yourself: "Of course I am invested - I have 23 Bond ETF's and 12 stock ETF's."

Folks, that’s not investing. That is confusing activity with accomplishment by mixing all the pretty colours of the rainbow together.  

Do you know what you get when you mix all the pretty colours of the rainbow together?  

A dark, murky grey.  

It’s what the future looks like when fear embeds into your view.

Like saying: "I am being prudent - sitting with 65% in cash - I am ready to buy on the correction."

My a*** you are.  

Make certain you understand what your psyche is telling you.  

RARELY does that cash go to work at lower numbers.

At lower numbers all of the things that terrified you before are now flashing red. And instead of being ready to go all in, your mind is choking you with how smart you were - and how much worse it will get.

Think back to Christmas Eve morning five months ago, when we went down to Dow Jones 21,700.  

And then, last week, we were Dow 26,700.

During that entire timespan the equity fund investing audience was removing cash from equities and flooding into the bond market.

Hence the recent sub-2.00% rate level for the 10-year.

Yep, that’s 2.00% GUARANTEED for a decade.

Can you even fathom where the markets will be in 10 years?  

If the last 10 years is anything to go by, I bet they won't be lower.

Where Have All the Bulls Gone?

Three days after the March 9, 2009 lows of Armageddon 2008-2009, when we stood at Dow Jones 7,000 and change, the Bullish reading for AAII was 27.5.

Today, it’s 29.5, and we’re at Dow 26,000 plus.

Those perceptions in March of 2009 - about our future - were, of course dreadfully incorrect.  

That fear cost many a fortune. The data shows us, as it does for so many other points in time just like it, how these are opportunities.

Yet the same investor errors keep unfolding again and again.

There have been 529 weeks in the history of the AAII data (first chart above) where the markets hit new all-time highs within 24 hours of the release of that weekly reading.  

In 48 of those times, the readings were between 20% and 30%, like they are now.

Nerd speak tells me that’s the 8th percentile. And my rocket-scientist calculator reckons that means in 92% of the occasions where this has taken place before, the bullish perspective was higher.

That means $Trillions in market rocket fuel is loaded and ready to go.  

Lower levels in the markets will NOT bring those dollars in.  

Higher levels will.

Sentiment has worked the same way for the last 10 decades.

With all due respect to the analyst noted - ignore the blathering on about crap that is useless and instead focus on the title of the headline - specifically "wait-and-see."

Eh, when will the stocks no longer be deemed as "wait-and-see"?

I can tell you they sure won’t be telling you that at lower prices.

One More Viewpoint

We often talk sentiment and emotions.  

Last week’s data was good. And it gets even better when we can see the impact over a moving average of eight weeks.

Here is the latest data on multi-year lows:

The image above is the YCharts data showing the 8-week moving average of the AAII bullish sentiment.  

I have added a horizontal line in purple showing the historical trend.

The last time we were below current readings was the start of 2016 - when markets had, "their worst start in 80 years...." due to cheap oil.  

That was supposed to be bad for us, remember?

I drew a red line from those lows (Dow 15,500) to the highs where the crowd "felt better about the future" at the start of 2018 (while at Dow 26,500).

What you see is that:

• The crowd did not feel better until after a 71% rally.
• Last week the same market looked out over that 2018, peak following a circa 18-month trade range, they felt almost as bad as when we were 11,000 points lower.

You couldn't make this stuff up.

Remember, risk is the source of long-term investment returns.