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Friday, April 16, 2010
"Be fearful when others are greedy, and be greedy when others are fearful."
– Legendary investor Warren Buffett, one of the world's richest men
Now, my friend, is a time to be fearful.
It is the opposite of a year ago. Back then, it was time to be greedy – and we were...
Almost exactly a year ago in DailyWealth, I wrote an extremely bullish story, called "The Great Rally Before the Great Inflation."
At that time, investors were downright scared. But I said stocks would have one of the greatest bull runs in history. What I wrote turned out to be exactly right. But today, things have changed...
I believe we're near the end of that great bull run. Take a look at what I wrote a year ago for perspective... then let me share with you where I think we are now.
From DailyWealth, April 24, 2009:
Stocks could rise dramatically over the next 18 months or so. I believe stocks could have one of the greatest bear market rallies in history.
...The market is telling us the bill for the government spending isn't due yet. Risk is subsiding... And the recession will possibly end sooner than anyone thought.
...I spent the last two issues of my newsletter, True Wealth, recommending speculative positions in stocks good for 12 to 18 months. I expect we'll see rallies of 50% in all the things I've recommended.
...What we're seeing now will turn out to be one of the greatest bear-market rallies in history. I know the bill for the government spending will come due some day. But for now, as long as Bernanke is juicing the economy and keeping interest rates at zero, stocks can run. Take advantage of it.
We took full advantage of that opportunity in my newsletter, staying invested for a very long time – even after the market had soared by record amounts. But times are totally different now...
Since the March 2009 lows, U.S. stocks have nearly doubled. The price of oil is up over 100%. The price of copper is up over 100%. The list goes on.
It's just gotten silly. And NOW investors are ridiculously optimistic... AFTER the 100% gain.
Folks, the time to buy was BEFORE the 100% gain!
In March 2009, investor sentiment was at an extreme of pessimism. THAT was the time to buy.
To put specific numbers on it, "Dumb Money" confidence, as measured by my friend Jason Goepfert of SentimenTrader, hit a low extreme of 21 in March 2009. Today, it sits at 75 – it hasn't been higher than that in years.
After weeks and weeks of a "safe" bull market, investors are downright greedy these days.
Don't fall for it.
To succeed in investing, you must do what Warren Buffett advises: "Be fearful when others are greedy, and be greedy when others are fearful."
It's been years since the "Dumb Money" was greedier than it is today. Trade accordingly.
Around the DailyWealth office, we keep a close eye on Jason Goepfert's analysis... He has an eye for spotting big changes in the market. In mid-March 2009, for example, he told DailyWealth readers, "I believe we're likely at the inflection point, where we'll see a multi-month bottom take hold." See how he nailed the bottom here: It's Time to Buy into This Rally.
According to DailyWealth contributor Dan Ferris, stocks are "not offering enough earnings, enough dividends, or enough value" to compensate you for the risk you're taking on right now. Get the details – and one stock that is safe enough and cheap enough to buy – here: Why You're Crazy to Buy an Index Fund Right Now.
THE SHANGHAI COMPOSITE GIVES IT ANOTHER GO!
Should the "Dumb Money" selloff Steve writes about occur, one of the most vulnerable indexes out there is the "Dow Industrials of China," the Shanghai Composite.
The Shanghai Composite is the most widely used gauge of Chinese stocks... and it's managed to carve out an interesting stock chart.
We recommended buying emerging markets like China in our special "rebound trade" series in December 2008. Soon after our recommendation, the Shanghai composite screamed 75% higher in less than year. It then sold off after reaching a blow-off peak of 3,400 in August 2009.
The Shanghai composite made three attempts at besting its old high... with each attempt failing more miserably than the previous one. A repeated set of failures like this is usually followed by a sharp correction... It's a strong sign all buyers are exhausted. But the recent flood of money and bullishness into global stocks has prevented this natural decline. In just the past few months, the index has made another attempt at those old highs. Chances are good it will fail again.
In The Daily Crux