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Successful Investors: "Avoid the Fruit, Embrace the Spear"

"Big-time" commitments to the stock market often come at precisely the wrong moment

by Bob Stokes
Updated: February 06, 2017

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[Editor's Note: The text version of the story is below.]

The financial optimism that's accompanied the Dow's rise to 20,000 is evident in this Jan. 25 Forbes headline:

Why The Dow Can Go Much, Much Higher

Three days later, a Barron's cover proclaimed:

Next Stop

Dow

30,000

Yes, nearly eight years (March 2009) since the U.S. stock market started its climb, pundits are saying that it's not too late to invest in stocks.

This sentiment does not surprise us: On Dec. 30, 2016, our Elliott Wave Financial Forecast noted:

As the major U.S stock indexes approach their final highs, measures of investor optimism will probably get pretty frothy.

Indeed, besides pundits, the optimism of professional money managers has reached an extreme. Review this chart and commentary from our just-published February Financial Forecast:

This chart of mutual funds' cash-to-assets ratio ... is a monument to Grand Supercycle optimism. December brought a new record low of 3.0% to total mutual fund assets.

The dotted lines show the new mark and prior extremes: a reading of 4.0% that came seven months ahead of the final high of Cycle wave III's triple top in January 1973; a 4.0% reading that coincided with the Dow's January 2000 peak; and a record low (at the time) of 3.5% that hit the very month of the 2007 peak in the Dow Jones Composite index and three months prior to the S&P 500's October 2007 top.

Also keep in mind, as the Financial Forecast notes, that the cash-to-assets ratio has remained below 4%, the record low until 2005, for all but one month over the past eight and a half years!

The impulse to herd is powerful. When almost everyone is bullish, it can be difficult to think independently. Here's what our May 2016 Elliott Wave Theorist had to say:

A speculator can learn to avoid the herding trap, but it isn't easy. Human minds are well suited to working out logical problems, but they are poorly trained in guessing the future course of crowds. Human brains evolved to participate in crowds, not analyze them. ...

Buying during rallies is as natural as plucking fruit off a tree, and selling during declines is as natural as dodging a spear. To win, you have to do the opposite of what's natural. You have to avoid the fruit and embrace the spear.

In conjunction with a knowledge of sentiment measures, the Ellliott wave model can help you "to do the opposite of what's natural" in the market.

Right now, the Elliott wave pattern of the Dow Industrials appears to be approaching a crucial juncture.

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