Point and Figure: Investing Sometimes Goes Against Nature

by | Jul 31, 2010 | Asset Management, Point and Figure

It’s against human nature to be bullish these days.

You don’t have to think long and hard about it: the economy is in the tank, your neighborhood real estate values are falling every week, we ALL have friends who have been out  of work for a year-plus…with no new work in sight.

No credit, low bank balances, and oh…have you looked at your brokerage statement lately?

So yes, it’s against human nature to be bullish these days.

Which could be a big mistake.

Each month, the University of Michigan releases a “Consumer Confidence” report.  You may have heard of this on the news.  It is called the University of Michigan Consumer Sentiment Index.  And this month (July 2010), “consumer confidence” has fallen to the lowest levels in a year (Bloomberg).

The objective of the survey is to gauge attitudes about business, personal finance, spending and forecast future spending.  This monthly survey basically takes people’s temperature (optimistic/pessimistic) about the economy.

In a nutshell, here’s the twist: Since the survey began, when people feel generally optimistic, over the coming five years the market does poorly (S&P 500).  And, when people are generally gloomy, the market (S&P 500) tends to do well over the coming five years.
(source: systematicrelativestrength.com)

I have a few “personal indicators” too.  Like a few clients I do not hear from often and have a tendency to call at extreme turning points in the markets.

Here is just one example:  I have a client who I speak with a few times a year who called me on April 23rd (the recent peak in the market) wondering if we should put more money INTO the market.  Which would have been a mistake – then.  This very same person called me back – just last week, as indicators are starting to turn up.  This time, they were wondering if we should be selling more.  A good “contrarian” indicator!

The main message here is try to set aside emotions, and almost ignore what’s happening in your world.  Your local universe can have an influence on your decisions.  When things are looking good, you know it might just be a mirage.  Likewise, when things are looking pretty grim, it could also just be a mirage.

I like using these point and figure charts to help manage your money.  They carry no news or events on them – just X’s and O’s.  These charts form patterns and trends, and give us clear signals when to make changes.   And, as so many of you have heard me say, “when the charts change, we change.”

When you can set aside the news (or noise), it makes making investment decisions easier.

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