What This Massive Sentiment Shift Means for Investors
Dear Wall Street Daily Reader,
Deadly virus? What deadly virus?
It seems that extreme optimism is taking hold out there…
I flew home to Florida a few weeks ago, and the plane was packed. Every single seat was taken, including the middle seats. The waiting area in the airport was like old times – shoulder to shoulder.
I went out to dinner the night before in Baltimore with my business partner Dr. David Eifrig, my right-hand man of 10 years Brett Eversole, and a few others. We ate outside… But like the plane and the airport, the restaurant was packed – every seat was taken.
We walked from the Fells Point area, where the bars were packed… to Harbor East, where the restaurants were packed… and we thought: Baltimore is back!
It’s not just Baltimore, either. Good luck getting a reservation at any restaurant these days, much less a seat. And you better make your travel reservations soon… The hotels at home in Florida are booking up FAST.
This is a major change. And as I’ll explain, it shows that we’re nearing a major turning point for the markets…
Two months ago, we had the opposite situation…
The airport was empty. Restaurants were struggling. And hotels were ghost towns.
I have never seen such a dramatic change from mass pessimism to mass optimism as we have seen this year.
Folks have good reason to be optimistic…
My doctor – who is not a man of hype – says, “Every American adult who wants a vaccine should be able to get one by the end of April.” He says that vaccine supplies are quickly moving from scarcity to abundance.
So what does this have to do with investing?
A lot. Everything. But maybe not in the way you think…
You see, markets don’t actually move higher simply because times are good. And they don’t move lower when times are bad.
Let’s say that Apple reported that earnings are up 20%. Sure, that’s good. But that information isn’t what will move the market. What will move the market is where that number stands relative to expectations…
If investors were expecting earnings growth of 15%, then Apple’s stock will soar. If investors were expecting earnings growth of 25%, then Apple’s stock will crash.
So then… if markets move on expectations, when is the optimal time to buy? When is the optimal time to invest?
The ideal time to buy is when investor expectations are low… when it’s easy for a company or a market to exceed the bar.
Today, people are incredibly optimistic, which is nice – as human beings, we want things to get better. But people might even be irrationally optimistic at this moment.
Two months ago, they were pessimistic. They didn’t want to take the risk. Today, they are willing to take a risk. They’re betting that they’ll be OK.
I’m simplifying it, of course. But I hope what I’m saying makes sense.
To give ourselves a shot at the biggest gains, we want to buy when everyone is overly pessimistic about an asset or market. Then, we want to ride that uptrend as far as possible.
When investors get overly optimistic – like they are today – it’s a major warning sign. But importantly, it’s not the sell signal…
The Melt Up is still in place for now. And we want to ride it as high as possible.
The sell signal arrives when the downtrend arrives… That’s when we want to get out. And despite a huge shift in sentiment, we’re not there yet.
Editor, Daily Wealth