SO, UM, WHERE IS THE PANIC AGAIN?
It's cool to be a contrarian. It's like being a Michael Jackson fan in the 80's. A Nirvana fan in the 90's. A mortgage broker until 2006. And a foreclosure specialist until present date. All market participants have their favorite ways of measuring fear, greed, depression and despondency.
Since August 1st, I have been saying that we are entering a period where contrarian theory will be tested. Watching your favorite indicator for clues as to when and where the market bottom stopped working a couple weeks ago. There is no reason to expect it to suddenly click. Market participants, however, have a way of rationalizing favorite indicators to the point where they can make the color green seem like blue if it appeases their emotional and intellectual market ego. Be careful of that as it means you have one foot in the grave and the other slipping in the mud.
Contraianism becomes a costly disease during points in time when markets have a single minded purpose either to the upside or downside. This current decline in the markets kicked off with an excess of pessimism that had a lot of people doubting its validity. According to the study I posted here on July 31st, the fact that the market was ignoring the excess in bearish sentiment made the downside all the more dangerous, only serving to strengthen its validity.
Take the excess optimism that has been apparent to everyone in the gold and silver markets for this entire year. Contrarians who attempted to doubt the uptrend and take on short positions have had to deal with a continuous move up for the majority of 2011. There is a time when the "deception mechanism" of the market breaks. Upon breaking, the uptrend or downtrend becomes self-reinforcing and accelerates greatly over time. These are markets that are the most dangerous to those attempting to pick tops or bottoms based on simple "everyone is bullish or bearish" theory.
The equity markets have a very simple and accurate means of judging panic and fear. With a commodity like gold, it is one single commodity issue. You don't have any periphery commodity issues that can give you clues as to what gold is going to do. It is a singular entity unto itself.
However, with the broad stock indices, you have thousands of stocks that can give you hints as to what certain groups of investors are thinking, loving and hating. I detailed this in my article about Phase 4 Investors in written in February.
At present, it is important to look at the most widely, popular names in order to gauge the levels of fear in the marketplace. AAPL is by far at the top of that list. In fact, AAPL alone is all you need to gauge the fear. Let's add AMZN to that mix. And for the more conservative, let us add MCD.
Here are the charts, along with commentary:
click to enlarge
AAPL
AMZN
MCD
