Why is it the proper play to fade bullish sentiment? The simple reason is that when you have a situation like what we have above in Live Cattle at the recent top, everyone ought there who could buy had already done so. Where was the buying going to come from to propel this further upward? Prices fall due to a lack of buying, not from aggressive selling. The aggressive selling during mass panics can accelerate the moves, but it does not start them. Here is one very current example of what happens when the majority of people agree on something, Barry got elected. We all can see now how that worked out, the single biggest disaster in the history of the world.
Another example that is taking place in my life, is the miracle recovery of my one dog from cancer due to my supplements I gave him. The consensus in the veterinary community and I have had some of the top vets in the country involved in this, was the was nothing else that could be done. He was terminal. In fact had I been a doctor, he would not be here now because I would have been trapped in the paradigm of what the vast majority feels is the proper treatment of this disease. I would have not given him what saved him, it would not even have been considered. Now the "majority" want to know how in the world I pulled this off! They want to do Xrays blah blah blah. I have told them no. There will be a time if this continues where the world can benefit from this as it appears to be a landmark case. Until then I will let the "majority" shake their heads in disbelief. It is already proven that what I did is a quality of life improver with no side effects. How far beyond that it is still is yet to be determined. It certainly appears to be a possible cure but I think it is too soon to tell. One thing I am not going to do is let this dumbkopfs put him through a bunch of tests stessing him out. The facts speak for themselves.
This reminds me of all the experts paraded out everyday, none of whom predicted the stock or real estate crashes. Now they are predict a recovery. Hmm...... gives you something to think about doesn't it?
It is always cute to be a wise ass at parties and have contrarian views on things, but you better be prepared for what will follow. I will never forget back in 2006 telling everyone wherever I went the housing market was going to crash and it is the reason why I sold my Newport Coast Mc Mansion and cashed in. I went back often to parties in the old hood, and will never forget my one neighbor telling me I was nuts and that he was making 35% a year in retail real estate. Of course I told him it would not last, and obviously he has been wiped out by now I am sure. He was piling alot of money into that. I think his scenario specifically was a ponzi scheme of some type due to it's "guarantee" of returns. However, it does not change a thing, the basic concept is we want to fade the herds at extremes. Of course in this prior example that was a local realtor running that cute little, "they are not making more land" skit at me. I was not a professional and therefore knew not what I spoke of. Oh really? She is no longer in the Real Estate business today.
We do not want to fade the herd in the middle
That is the $64,000 question, how do we know when we are in the middle? Although we can never know for sure, the best way to view sentiment is comparing it to prior activity in it. For example just because we have a bullish stance by a large majority, we do not just go out right away and sell. It is important to compare it to what happened the last time sentiment reached current levels. Also, we want to make sure we are not comparing it to such a short prior history that it is just a wiggle in the data. Generally I use 6 month and 3 year lookbacks. This gives me enough of a time element that I am not getting trapped looking at what just might be an acceleration in the very near term in consensus. Short term changes will often accelerate trends, so you do not want to jump in front of too many of those.
In the above case, that bullishness did not represent a historic high, but it did represent a several month high, and the market was also in a weekly downtrend, so it was a nice combination of trend and fundamentals. I suggest you research this and find your own patterns, I have given you the basic premise here. The above example in real estate is also an example of the power of a trend. We did have excessive bullishness at historic levels for a long time before things came crashing down. However, be assured of one thing, when everyone is that bullish on anything it will ultimately build a bubble that will be followed by a crash. It is just a matter of time. Gold Bulls are the next victim, the question is just when not if. It could be a year, 2 years, I have no idea. I do know though that when that crash happens it will be talked about for decades, and you will want to fade that sentiment.