Why was the market up so big yesterday (and so far today as well)? Herd mentality; simply put, too many investors were negative on the stock market and the prospects for resolution out of Europe. As I titled this blog, too many people ran to one side of the boat, and that doesn't work very well if you've ever been in a canoe for example. Investor sentiment and opinion is what makes a "market", one person likes one thing and wants to buy it whereas another person doesn't like one thing and wants to sell it - just like buying a house from someone. With all the uncertainty that has come out of Europe, with our economy, the dislocation in Washington, everyone all of a sudden started crying "chicken little". And come to find out, as dismal as things have been and confusing as they still are, the sky didn't fall (as in the story of Chicken Little).
Consider these statistics:
- investors have pulled (sold) 400 billion plus out of stocks since 2007 and have invested 800 billion plus in fixed income bond funds - that's a total addition to fixed income funds of approximately 1.2 trillion dollars
- more money has been sold out of stocks over the last 3 months than any other previous 3 month period since 2008
- everyone has been on the gold wagon over the past 6 months especially (as can be seen by the number of "we buy gold" signs everywhere and the gold commercials on tv), but as more and more people began to desire to buy both gold stocks and actual gold bullion, the price of gold has fallen dramatically recently to the tune of almost 23%!
In looking at the statistics above, can you imagine how powerful a potential reallocation (move out of) out of fixed income investments (which are yielding/paying hardly anything - ie CD's and Government bonds) and back into stocks (which are extremely cheap and pay great dividend yields) could be over the coming months?
My point in saying all of this is that an investor needs to always stay grounded and focused on the bigger picture of stocks and stock market trends. When it starts to appear that everyone is moving towards one side of the boat, it's probably a prudent idea to re-examine one's investment positions and try to think about what other scenarios and investment opportunities may lie ahead. Be quick and nimble, and try to stay ahead of the crowd because there's a lot more grass to eat if you get there before all the other "cows" do...
