While I happen to be a giant fan of the Daily Sentiment Index (DSI), I also use a bunch of other signals. The DSI is the single best indicator I've found but there are dozens of other measures of investor sentiment. If you are a contrarian, you search constantly for some way of figuring out what investors are thinking.
Investing at a profit is actually simple. The mob is always wrong. Always wrong. Figure out what the mob is thinking and do the opposite.
The DSI for the S&P and the NASDAQ has been hovering around the 85–90 range for the past two months. That's not a screaming signal, such as I wrote about a year ago when the market crashed. However, a lot of other indicators are indicating major problems ahead.
In mid-November the stock market rally that began in March 2009 became the best performing, as well as the longest, bull market since World War II. It's gone higher since then, touching 3,245 on the S&P late last week. As of Friday, Dec. 27, the NASDAQ had been up ten days in a row. That's the kind of move that gores bulls.
I tried to make a point in my last book that markets go up and markets go down. That seems both simple and obvious, but investors tend to believe they can invest using a rear view mirror. They cannot.
Bull markets breed bear markets. When you have the longest and best performing bull market in history, it's both illogical and poor investing to bet on those conditions to continue. We will have a bear market. It's not a question of if, just a question of when.
I believed the crash would begin in October and actions of the Fed indicated that they, too, saw a crash around the corner. On Sept. 16, the Fed panicked when the Overnight Repo rate shot up to over 10%. They have poured hundreds of billions of dollars into the Repo market in an effort to provide liquidity to an increasingly unstable market, and ballooned their balance sheet by $406 billion.
The Fed is not calling their pumping money into the system quantitative easing (QE) 4 or QE Infinity. They are calling it a duck. Because if it walks like a duck and quacks like a duck, it's really QE. The Repo market is nothing but another canary in the coal mine. The canaries are dropping like flies.
When markets bottom, the level of fear is palpable. But when markets top, complacency rules. One year ago when the markets took a tumble, the fear index was at 8, showing extreme fear. A few days ago we had a reading of 93, saying extreme greed or complacency. That's more extreme than the market bottom I called correctly one year ago.
The price of gold and silver often run contrary to that of the general stock market, but ignoring all the danger signals coming from the COTs, the metals continue higher.
Something has changed: the central banks are buying more gold than they have in years. As the Dutch central bank has spoken on the record, when the system fails, gold will help provide a solution. "If the entire system collapses, the gold stock provides a collateral to start over. Gold gives confidence in the power of the central bank's balance sheet. That gives a safe feeling."
The world finds itself awash in $250 trillion in debt, which anyone who can add and subtract will understand can never be repaid. We have more bubbles forming than that of a six-year-old taking a bubble bath. One day soon those bubbles will begin to burst.
I've said for years that the key to investing success is to buy when an investment is cheap and to sell when it is dear. Virtually all asset classes are absurdly priced. The stock market earned more in 2012 than today, yet has doubled. When complacency is so common that the greed index is more opposite what the fear index was on December 24, 2018, a crash is nigh.
Be very, very fearful. One measure of the any top or bottom is that Mister Market does whatever it needs to do to cost the greatest number of people the most money. Few pundits see what is coming around the corner. That's when tops happen.
As the everything bubble pops, the financial system will destroy most investors because they are unprepared. When you become greedy, get ready for a world of hurt.
Bob Moriarty founded 321gold.com, with his late wife, Barbara Moriarty, more than 16 years ago. They later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. Previously, Moriarty was a Marine F-4B and O-1 pilot with more than 832 missions in Vietnam. He holds 14 international aviation records.
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