Market psychology is a fascinating thing to learn and understand and react upon.
Because the market is so good at conditioning us in one way right before turning from us cold-hearted, as you end up crying-feeling as though your girl friend cheated on you.
It’s always easy to know and learn and tell others to do something, but the hardest thing in trading and in life is actually doing it (not knowing or learning); because everyone knows and everyone learns, but only few can apply it and live by it and practice it.
So, what is it mean when Mr. Buffett said, ‘be fearful when others are greedy and greedy when others are fearful’?
Well, market is never that simple as one statement where you could just take this and fully understand about the market. There are more in what he is saying, and it works in fractals of the market. So, first, we have to understand what context are we going to put this statement into a perspective.
Let’s check out the monthly-chart of the Dow below.
Monthly chart of Dow Jones from 1970 to present
Here you can see in the chart above, we are entering into the highest level of optimism we have not seen in 50 years.
This is a fascinating thing to watch and be part of, because man, it only happened once in 50 years and today we are living in a historical event.
But, what you have to understand is, can you really bet on something that only happened once in 50 years as your routine strategy? It means, if you were betting on this just in the last month, the statistical probability suggests that you got lucky on your hand on the last card. It means, the market now has conditioned you to think that this is normal and routine occurrence in which you can profit going forward and base your system out of. Remember what I said in the beginning of this post, market is good at conditioning us in one way right before turning from us cold-hearted. Well, I hope you don’t base your trading system/strategy out of this recent event, because it may never happen again for another several decades.
So what context are we talking about when it comes to “Be Fearful When Others Are Greedy” regarding today’s market sentiment?
Are we talking about in the context of the next big crash in the market?
I definitely believe that this is the level NOT to be greedy, but fearful.
I don’t believe this is the sign for the market crash, but sign for a corrections in the intermediate term.
SPY 1995 – Present Weekly-Chart
I am preparing for about 5-7% corrections on S&P 500, about 7-10% on Dow Jones Industrial Average, and 9-12% on the NASDAQ.
Extreme overbought sentiment is a very good thing for the market in the long/primary term (as you can see in the chart above), but in the intermediate term, odds are catching up against the buyers.
I am a long-term options-trader and a active investor. I have been accumulating multitude of stocks and options before the election and early summer of last year. In the last month or so, including this week, I have been busy unloading many of my positions–mostly the option positions.
This is the phase where many of the bears who lost lot of money in 2016 betting on the ‘crash’ and sat side-line all throughout 2017, now converting into a full on bull out of fear-of-missing-out. This is the phase where many of the skeptical bulls didn’t profit much in the market last year, now finally converting into a full on bull to make up for the missed/lost opportunity. Market has no mercy for traders and investors like these–trust me, I am admonishing you from experience.
2017 has been a great year for many, and it was my greatest year in my career but I think the party is in the last ‘boom’ phase in the intermediate term.
I am bullish long-term, I believe the market will resume back up after the corrections and continue with it’s primary-term uptrend. But in the intermediate term (several months or so), I am cautious and taking necessary risk management actions.
