Last week, we talked about holding our nose and buying the euro. One of the least-mentioned and least-used aspects of trading and investing is sentiment.
At market tops, news is good and people give you all the reasons in the world to buy.
At market bottoms, they give you all sorts of reasons to sell. However, this sentiment is exactly what occurs at market tops and bottoms.
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I recently saw a trader on CNBC state that the Chicago Board of Options Volatility Index, or VIX, was above 35 and nearing 40 and he wanted no part of the volatility.
He ignored the fact that the VIX (a reflection of fear) gives great buying signals when it trades above 40. Actually, VIX readings above 40 coincided with every intermediate market bottom during the past 13 years.
Sir John Templeton made his living by “buying at the point of maximum pessimism.” This means that you should buy when people are the most negative.
Someone once asked Sir John when he thought the outlook for a certain stock or sector was the strongest. He answered that he didn’t want to buy when the outlook was the best but rather when the stock was hated and the news and outlook was the worst.
Warren Buffet wrote an article near the market bottom of 2008 that advised to be fearful when others are greedy and greedy when others are fearful.
These days in the markets, we have worries about Greece, fears about the euro, hesitation about China and nightmare about military activity in South Korea, North Korea and Israel.
The VIX recently spiked above 40, a level only seen four times in the past 13 years. Each time this occurred at or near a market bottom.
When the VIX is high, so is fear. When fear is high, that’s when you should buy.
A recent poll of investors by the American Association of Individual Investors found 51 percent were bears and 30 percent were bulls, the highest bearish reading since the financial crisis.
I also watch about 10 key technical indicators which help me trade the markets. All 10 are reaching oversold levels normally seen near market lows.
Watch the analysts on TV: How many are predicting higher markets or a higher euro? That is a sure sign of too much negativity and that the market will soon rally.
About the Author: David Skarica
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