In my book I emphasize that a contarian trader has to be on the look out for signs of crowd sentiment and group think that show up in unusual ways - not simply in newspaper headlines or magazine covers.
Yesterday I went to see Quentin Tarrantino's new film Inglourious Basterds. What struck me from a contrarian standpoint was not his film but the movie trailers (advertising upcoming movie releases) that preceded it.
The trailers started with one promoting Jay Leno's new prime time show. It placed Leno in some sort of cave and in a situation where he was being threatened by mysterious and malevolent forces. It ended with Leno running while looking into the camera and saying "If I get out of this alive watch me on prime time this fall!". Quite an interesting way to promote a comedy hour!
Then there followed six (count 'em, six!) trailers for what can only be described as horror films, including Halloween II and Wolfman. Every single trailer conveyed dark, terrifying moods and showed scenes in which monsters of one sort or another were attacking ordinary people.
Keep in mind that these films are in production this year and so were in the idea and contract stage in 2007 and 2008. I take this as yet another manifestion of the public's dark mood in 2008. Hollywood is a media business and as such tries to give people what they want to watch. Evidently its media moguls figured that horror films fitted well with the public's mood in 2007 and especially 2008.
This is just one more indication of the strength of the bearish stock market crowd that I think reached its maximum in March of this year. The intensity of the emotions (principally fear) of this crowd probably set some sort of record, and I think the movie trailers I saw are good evidence for this.
The main thing to keep in mind is that emotional swings in crowds take a long time to play out. The bearish sentiment of the stock market crowd at the March lows was so extreme that I think it will take years to dissapate. This to me means that the March 2009 low was probably a generational low, similar to 1932 and 1974.
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You are right about the horror movie -> mood point of view (something Robert Prechter mentioned many years ago) but my warning would be that horror/gore movies have been very fashionable for at least 3-4 years, so it's not knew...
ReplyDeleteCarl, please share your views about Robert Prechter's position that March was not the ultimate low.
ReplyDeleteI think you make a very good point in your article about crowd sentiment, and I think many would agree with you that the market made a generational low in March. I personally disagree mainly because many smart people have learned through the financial crisis that our entire financial system is on very shaky ground, and the fundamentals underlying it are very poor and being supported almost entirely by a government that has been able to print huge sums of money with almost no short term consequences for such misguided actions. However, in the longer term (say next several years), several serious consequences will begin to appear and severely threaten our economy again. The entire fiat currency system may very well be threatened as well, as it has not held up over long periods in world history.
ReplyDeleteSo I am not saying that for investors that it necessarily means they should short the markets anytime soon, but rather that they should liquidate longs soon and look for other areas that will benefit over the long term. The area I feel will do best is gold related assets, since the Fed has clearly shown they will try to prevent deflation at all costs, and this will take a large toll on the dollar and should benefit the gold price and gold mining companies due to the inflationary consequences of such actions.