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Last
week I went out of town to the Cambridge House Resource Investment Conference
in Phoenix, Arizona. They had about 1,500 attendees,
which is about half of the number they get in Toronto
and Vancouver.
There were about half of the booths there too. The tone of the conference was
decidedly negative when it came to the US stock market and even to
metals stocks too.
Most investors I
talked too were nervously holding their mining stocks. I listened to the two
main speakers panels on the first day of the conference and just about all of
them appeared to expect some additional selling in gold stocks to take place.
The moderator of the panel asked all of the speakers if they still thought
mining stocks were worth owning with the stock market in a bear market. One
person responded by saying that he buys mining stocks that he expects will
make good discoveries that will eventually cause their stock price to go up. If
the market makes them drop for now they'll eventually go up later. A lady on
the panel said she had put all of her money into treasury bills and expects
to keep it their for two more years.
Everyone seemed
to agree that the stock market is dangerous right now and the consensus was
just the same on the second panel. A lot of people claimed that the US banking
system is totally bankrupt and could cause a market crash at any moment. Paul
Van Eden talked about deflation.
Everywhere you
look the news is bad. Economic numbers are negative, earnings are bad, and rumors of bank failures are everywhere. Investors who
have been holding on to gold stocks for the past four weeks and have seen
them trade sideways have become anxious while CNBC fund managers talk of the
market breaking its January lows if bond insurers don't get a bailout.
It is hard to
find anyone who thinks the market is going to go higher from here and it is
hard to think of a time in which everyone is so negative on the stock market.
Since the sharp drop in January the market has basically traded in a range
and gone nowhere. During this time people have gotten increasingly anxious
and negative.
 
Of course from a
contrarian stand point this is exactly when you want to buy. The crowd tends
to be wrong at market tops and market bottoms. At the October top over 60% of
the people who respond to the Investors Intelligence survey were calling
themselves bulls. Last week that number dropped all of the way down to 36.7%
while the number of bears rose to 35.6%. This is the fewest number of people
calling themselves bulls seen since the end of the last bear market in July
of 2002. There are even few people calling themselves bulls now than there
were at the last major bottom in August of last year while the bulls minus
bears spread is at a level not seen in over two years.
It is not a good
idea to ignore the Investors Intelligence survey. There has never been a
major market drop in the months following readings like this.
In fact these
readings actually make me more bullish on the stock market than I was a week
ago. Up until then I was expecting a rally that would last 6-8 weeks and take
the broad market averages up to their 150 and 200 day moving averages. After
that I expected them to top out and go through another bear decline. These
readings are so bullish though that I have to consider the possibility that
the market will rally longer and further than I have been expecting.
I don't know
that for sure, but what I do know is that the market is likely to rally so
much that it will take just about everyone by surprise. Everyone is talking
about bear markets and focusing on bad news, but news doesn't make markets. Markets
make news. In reality people base their investment decisions on their
emotions. They choose to buy or sell on how their positions are acting and
how that makes them feel. Falling stocks make people negative just as a long
rally makes people bullish and helpful. People sell when stocks drop and get
negative and buy in at the top. That's why the crowd is almost always wrong
at important market turning points and why it pays to bet against them.
In volatile
markets like this you must pay attention to investment psychology and learn
to buy bottoms and sell near tops to make money. We are not in bull market
that is going to allow you to just buy and automatically sell later. Nor are
we in a market where you can just buy or sell based on how pessimistic or
optimistic people on TV are and how the news makes you feel. That is a
guaranteed recipe to lose money. Instead you are going to have to watch the
chart patterns in the market and keep a close eye on sentiment indicators
such as the Investors Intelligence Survey and the VIX. You will have to
remember that news doesn't make markets. Markets make news. And that means
you'll have to understand how markets work to be one of the winners this
year. This is not going to be a year of the crowd.
For specific
ways to profit from a potential rally consider a 30-day risk-free trial to
WSW Power Picks. Just click here.
Mike
Swanson
Editor, Wall
Street Window
Disclaimer: Michael Swanson is the President
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