Here’s a tale from the retirement belt. It is the most recent piece of evidence that supports my belief that the average investor will always be out of sync with the market.
If you’ve followed me for a while, you’re familiar with a system I call the “Grill Quotient” (GQ). It’s a totally subjective, undocumented market direction tool that has never been wrong.
Did I say never? Yes, never. The only weak spots in the GQ are in my ability, willingness and readiness to see the indicator flashing. I’ll get to that in a minute.
It was around 9 a.m. on October 30, and I was finishing my breakfast at my usual place on the beach: the Grill.
One of the regulars – who, by the way, has done very well in this bull market and especially in the tech rally – was going on and on about how the market was going to be crushed even more. His prediction was that the Dow would sink well below 24,000.
Keep in mind: Before the market opened on October 30, we had been pummeled to the tune of about 3,000 points on the downside.
Mr. Regular wanted to show me all the charts he had compiled that clearly showed why the bottom had to fall out and why he was certain of his call.
The first flashing indicator: He was using charts. Charts can’t predict short-term anything. Nothing can. In fact, except for the 200-day moving average – an excellent indicator of long-term trends in stocks – charts, in my opinion, are pretty much useless. But that’s for another time.
My response was a cautious “maybe.” My gut had been telling me that the huge drops and, more importantly, the huge swings in trading ranges over the previous three days were a positive for the markets. But it was still a maybe.
The second flashing indicator: Mr. Regular could not be swayed. He was absolutely certain the bottom was already out, and we were about to enter a free fall.
The third flashing indicator: Mr. Regular, the epitome of the average investor, was certain of the market’s direction.
I missed all three big red flashing indicators. I missed the best buy signal the GQ has ever given off – three huge flashing buy signals, and I missed them all.
Even a 30-plus-year veteran of the market, yours truly, can be influenced by the power of a big sell-off. Looking back at my conversation with Joe Regular, that’s exactly what happened.
The market had been pummeled so badly in such a short amount of time that I was locked into the downside thinking and could not see the flashing buy signals.
I missed a 1,000-point move to the upside.
There are three morals to this story:
- Joe Mainstreet is always 180 degrees out of sync with the market. Bet on it.
- Never underestimate the power of a sell-off to cloud your decision making.
- Never confuse a bull market with brilliance.