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Embarrassing Blunders Wall Street Loves to Hide

Oct 28, 2011
Simon Maierhofer

There are just certain things investors love to hate to their own detriment. For example, what's not to love about a strong stock market rally? Rising stocks are great, except if you're watching it from the sidelines. Here's how to stop loving the wrong things at the wrong time.

The world is in turmoil and there are plenty of hate-worthy developments. However, there are some things investors love to hate. Loving to hate conveys indecision. Indecision is a manifestation of weakness.

The stock market feasts on investors’ weakness, so stop watching economic train wrecks while hoping there won’t be any casualties and start seeing things for what they are.

Here are 3 developments investors love to hate to their own detriment.

1) Love to Hate Analyst Predictions and Media Cheerleading

Who doesn’t love to read analyst predictions? Headlines like: “Why the Dow will hit 38,820” or “Top 10 stocks to own now” grab attention. Unfortunately attention doesn’t pay bills (at least not the reader’s bills).

More often than not, it’s the opposite. Analyst opinions can be outright dangerous. See for yourself:

Wall Street Journal: “Stock-market visions from Wall Street firms are Ho-Ho-Ho bullish” – December 3, 2010
USAToday: “Experts agree: Get over your fear and get back into stocks” – Dec. 16, 2010
Barron’s 2011 outlook: “Our group of investment experts sees stocks continuing their climb next year as the economic recovery takes root.” – December 18, 2010

What was the result of all those bullish calls?

AP on March 8, 2011: “2 years after market low, the little guy is back.” The below excerpt from that article shows just how dangerous the media’s hold on investors is:

“As a historic bull market reaches its second birthday, everyday investors are piling into stocks, finally ready for more risk and hoping the rally has further to go. Little guy investors appear to be on board. Since the beginning of the year, investors have put $24.2 billion into U.S. stock mutual funds. ‘It didn’t feel right to be back in until now,’ says Richard Dukas, who heads a public relations firm in New York City.”

Just like sugar candy, something that “feels” so right is often so wrong. Wall Street was feeling lucky and allowed itself to be lulled to sleep by the fake QE2 bull.

Quite to the contrary, the April 15 ETF Profit Strategy Newsletter warned that: “A major secondary market top is forming. It would simplify our forecast if the S&P would be able to reach the ideal 1,369 – 1,382 target for a major top before the summer doldroms.”

2) Love to Hate Nonsense Reporting about Europe

I had to go back all the way to June 2009 to find the first (or one of the first) references about Greece’s budget deficit (as it was lovingly called back then).

On June 26, 2009, the Wall Street’s Journal wrote that: “Greece seeks ways to cut this year’s budget deficit” and warned that: “Greece will probably see no economic growth this year – compared with the government’s previous forecast of 1.1% growth – and only return to growth in 2010.”

Greece’s Finance Minister Yannis Papathanassiou said, quote: “Our goals are specific and clear: to reduce the deficit below 3.7% of GDP and to ensure the credibility of our country in the international market.” How about that credibility?

Since mid-2009 the financial media has reported about a dozen times that the European debt crisis is over while Greece (and by extension Europe) continues to play financial yo-yo with gullible news outlets.

Reuters claimed yesterday (Thursday) that: “Wall Street soars on hopes EU finally has a fix.” This is only two days after the Wall Street Journal reported that: Fresh worries of recession grip Europe.”

The ETF Profit Strategy Newsletter provides news-neutral guidance and stated on September 23 that: “The SPDR Euro STOXX 50 ETF (NYSEArca: FEZ) closed at the lowest level since March 30, 2009. This low has come against a higher RSI reading, which suggests that, similar to U.S. stocks, European stock market may get some relief over the next weeks/month. The same is true for the worldwide iShares MSCI EAFE ETF (NYSEArca: EFA) and the Emerging Markets ETF (NYSEArca: EEM). Those markets are temperamental and will therefore bounce higher than U.S. stocks when the rally materializes. Aggressive investors may add some European/emerging or BRIC market exposure to their portfolio once we start buying U.S. stocks.”

When did we start buying U.S. stocks?

3) Love to Hate Missed Rallies

The October 2 ETF Profit Strategy update stated that: “Based on the studies discussed on August 14 and 21, I’ve been expecting new lows followed by a tradable bottom. I define a tradable bottom as a low that lasts for a few months and leads to a bounce that (in this case) should propel the markets around 20%. Therefore the recommendation is to buy once we’re near the low.”

The actual trade recommendation was to cover short positions or sell short ETFs at S&P 1,090 and buy long and leveraged ETFs after the S&P moves back above 1,088.

Since then the Dow Jones (DJI: ^DJI), S&P (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) have bounced 20% or more while European stocks (NYSEArca: VGK) are up nearly 30%. Based on various sentiment polls, most investors missed out on this massive rally. Generally we love to see stocks go up but we hate not to be a part of it.

The chart below was featured in the October 14 ETF Profit Strategy Newsletter and plots the S&P 500 against various sentiment measures. Of particular interest is the percentage of bullish advisor polled by Investors Intelligence (II). Here’s what the newsletter had to say:

                        

“From October 4 to October 11 the S&P gained as much as 145 points (that's 13.5% in one week), yet the percentage of II bulls was the same on October 11 as it was on October 4. Only 34.4% of polled advisors/newsletter writers were bullish, the lowest reading in over a year.  The hesitation of the II crowd leads me to believe that the year-end rally mentioned in last month's newsletter is still on track. The stock market's intention over the coming weeks will likely be to suck as many investors into believing that this rally is for real before it delivers the next big decline.”

As per IIs latest poll numbers, 40% of advisors and newsletter writing colleagues are now bullish on stocks and the bull/bear (difference between bulls and bears) spread was positive for the first time in six weeks.

Sentiment is improving but it’s not necessarily indicative of another high. Seasonality also remains bullish for the next couple of months. Technicals on the other hand, in particular parallels to the 1930 and 2008 counter trend rally, suggest that another powerful leg down is fast approaching.

The ETF Profit Strategy Newsletter makes sense of those conflicting indicators and provides a detailed short, mid and long term outlook along with actionable ETF profit strategies. Updates are provided at least twice a week.

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