If anyone has watched the news in the last six months, things would appear to be apocalyptic. Some of the main headlines you would have witnessed would be ”Credit Crisis”, “Record Foreclosures”, “Bernie Madoff – Biggest Ponzi Scheme of all Time”, “Greatest Stock Market fall since the Great Depression”, “25 Year Highs in Unemployment”, “Massive Bank Failures”, “401k’s Down 50%+” and the latest…”Swine-Flu Pandemic”. That’s enough to make a person feel like the world is coming to an end. In fact, many people are convinced we are approaching the “end of times” - there are close to 1 billion searches on Google for some variation of an “end of times” scenario. I won’t try to sugar coat what has occurred over the last year or so as the world has gone through some difficult times, but I will highlight some positives that you rarely hear in the main stream media. For starters, did you know the over the last month there was a 15 day period where the S&P 500 had it’s biggest rally since the Great Depression? In fact, since the recent low in the market the S&P 500 is up over 25% and the NASDAQ is up over 32%.
Here are some things to keep in mind as you listen to some of your family, friends and most importantly the main stream media. Media outlets gain higher ratings over panic-type news so it is only logical for them to exaggerate any story. This causes a chain reaction that develops into a negative feed-back loop. As people hear the story’s from the media of mass losses in the stock market, rising unemployment, bank failures, etc. combined with actual experiences of losses or hearing from a friend or family member of losses or hardships that they’ve experienced this will cause people to believe things are worse than they actually are. Remember that this happens on a massive scale and will create what’s called herd-like behavior. Then, after the “herd” processes all the information they will tend to do the opposite of what the “bigger”, “smarter” money does – they sell their stocks and go defensive. Unfortunately the herd is usually wrong and almost always wrong at extreme points in the history of the stock market (I would consider recent times as an extreme point). When fear is at its highest point the market usually bottoms. This phenomenon occurs because the herd acts on the present and the past and the “smart” money acts on the perceived future. The “smart” money takes advantage of the panic and of the herd by buying stocks after the panic selling, which gives the smart money the chance to buy low. The same mentality happens at market peaks, as well. When everything seems to be going great and the media continues to highlight how great the market is doing (like the tech bubble in the late 90’s), that is when the “smart” money is selling and becoming defensive and unfortunately that is when the herd is buying into stocks.
Some measurements of fear that we track have recently hit 21 year highs and even after the markets recent sharp rally fear indicators are still measuring at extremely high levels. Most would think this is a bad thing, but I’m telling you that this is a positive and a reason to believe the market could go much higher from here. On top of that the pundits in the main-stream media doubt this rally and most are saying that the market will come back down. This too, is a positive, as the herd is usually wrong at extreme points throughout history. As most of the herd has recently gone defensive, Allgen has been aggressively buying over the last month to take advantage of the recent rally and the high potential for future gains. History has shown that the biggest market rallies follow the biggest market drops; unfortunately the herd is usually late to the party and won’t participate in the majority of the gains.
Going forward our advice is to be skeptical of what the media is saying and what the herd is doing especially at extreme points in time. History shows that you’re usually better off doing the opposite of what the herd does.
Written By:
Jason Martin, CMT & CFP
Chief Investment Officer
Allgen Financial Services, Inc.
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