Herd mentality is the No. 1 killer of portfolios.
The idea is that if the herd is bearish, there must be reason for it.
Therefore, I should be bearish too.
But that’s a great way to miss opportunity. Look at gold for example.
In mid-2018, the metal plummeted from $1,360 to February 2017 support at $1,180.
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There were two reasons for that.
One, the U.S. dollar was rallying. And two, there were arguments for the Federal Reserve to raise interest rates on economic growth.
At the time, hedge funds had record net-bearish bets on gold.
And there was no shortage of bearishness.
“Wagers on gold’s declines outnumbered bets on price gains by 78,579 futures and contracts in the week ended Aug. 21, according to U.S. Commodity Futures Trading. That’s the fifth straight week that money managers boosted their net-short position on the metal,” said Economic Times.
“Gold Investors Give up Hope as Biggest Short in History Builds,” blared Bloomberg. “Gold is hitting new milestones of misery. Exchange-traded funds tracking the metal have bled assets for 13 consecutive weeks... [and] investors have placed the biggest gold short on record.”
“Speculators are also net short for the first time since December 2001, when gold was priced at $275 an ounce, according to Peter Boockvar, chief investment officer at Bleakley Financial Group, as quoted by CNBC. "It's literally off the charts. 215,000 contracts is double what it was the third week of June, triple what it was the second week of June. It's up nine weeks in a row.”
However, that’s not a sign that investors should be short.
Instead, it’s a contrarian’s dream come true. When traders become this bearish, it’s time to start buying. It’s time to buy the blood in the streets, as Baron Rothschild would say. It’s time to buy the excessive pessimism, as Sir John Templeton would say.
And it’s time to buy when others are fearful, as Warren Buffett would say.
This isn’t the first time we’ve seen a gold sell off of this size.
Technically, each time gold gets this oversold, the technical indicators have told us exactly when to buy. Going back to November 2015, look at what happens each time RSI falls below its 30-line coupled with an excessive pullback on MACD, coupled with Williams’ %R under 80.
That same set up began to appear in August 2018, even as an overly bearish herd was betting on further aggressive downside.
In short, be aware of what’s really happening.
Following the herd is a great way to lose your money – and oftentimes, your sanity.
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