SORRY BEARS: THE ONE GROUP OF INVESTORS THAT SIGNAL MARKET TOPS ARE NOWHERE TO BE FOUND
More and more traders seem enamored with the idea of the market topping in spite of the massive rally and generous market conditions. In order to entertain their obsession I am going to remind everyone of Phase 4 Investor theory. It is my own invention...and it works.
Case in point: On February 17th, 2011 I wrote the following article for TheStreet, "Beware the Phase 4 Investor Stampede." In the article I mentioned a certain group of investors who are reliably incorrect in their market assessments on a frequent basis. They pile into the same stocks. They exhibit sloppy behavior in their buying causing expansions in both volume and the trading ranges. They signify impending tops in the market with such great accuracy that they deserve a title of their own: Phase 4 Investors.
Phase 4 Investors like to pile into Phase 4 stocks. Phase 4 stocks are led by names like FNSR, JDSU and CIEN. The same names that the most speculative investors were trading 12 years ago are still bringing in the same types. To quote the article from February of 2011:
It's not just the fact that they are going up; it's the manner with which they are going up that should of the greatest concern. Phase 4 stocks tend to attract Phase 4 investors, meaning sloppy, run-with-the-herd type investors who simply pile in. The price action and volume seems to be confirming that Phase 4 investors are moving into Phase 4 stocks and throwing everything they have behind them.
Get cautious, get some cash and get ready. Phase 4 bulls are going to be having a change of vocabulary in the coming months, and the path to get there is never pretty.
The article called the top in these names to the week, with the exception of CIEN. Six months later FNSR was down 65% from that point. JDSU was down 65% from that point. And CIEN was off 60%.
The Nasdaq 100, in the meantime, had fallen 15% from the time Phase 4 Investors began french kissing their favorite stocks in public.
Phase 4 Investors proved, yet again, to be an invaluable tool towards accurately assessing sentiment at that moment. So it proves worthwhile to check on them from time to time to see where they stand.
Here are the charts of the Phase 4 names with commentary provided:
click chart to enlarge
FNSR
JDSU
Phase 4 Investor theory leaves us with one very solid takeaway: The most speculative of investors have yet to return to the market pushing up their favorite stocks. With that said, sentiment may not be as frothy as you are being led to believe by the multitude of indicators that exist nowadays, designed to throw your nose off the scent of the target.
While a consolidation or pullback is to be expected in the months ahead, we are nowhere near putting in that elusive top that everyone seems to be searching for. Bullish remains the way of the wise.
