Chaos. Fear. Panic. I've seen all of the above in the last few months, and it seems that the market uncertainty just keeps on building. If it's any solace, we're all in this together.
You may have heard that it's always darkest before the dawn. Well, that is very true with the markets, whether you are trading stocks or flipping real estate.
The reason is that investor sentiment is a contrarian indicator. When everyone thinks the market is going to keep on crashing, it is most likely to start trending up. When everyone thinks the market is going to roar upwards, it is more likely to collapse.
If you don't get the contrarian indicator principle, you can read all about it and investor sentiment in my recent blog, "Too Late for Panic." http://www.pennystocks.com/html/blog/blog/post/107/Too-Late-for-Panic/ )
Perhaps you've heard of the VIX index. Also widely known as the "Fear Index", it is based on the expectation of volatility over the coming days by options traders. Take a look at the VIX chart, and you'll see the levels spiking in a dramatic way that they never have before, nearly tripling in the last month, and blowing through all time high levels.
Put another way, since the inception of the VIX, traders have never been this freaked out.
Let me tell you what this data is really revealing:
- When volatility is greatest, it is a sign of a market bottoming out, based on investor psychology and history
- When the spread between bid and ask prices widen, that is the sign of a market bottoming out, based on investor psychology and history
- We're seeing bid/ask spreads growing in stocks and sub $5 shares
- The VIX is absolutely through the roof, implying an increased likelihood of a market bottom
- A high VIX gives a direct correlation to levels of uncertainty
- Greater uncertainty means investors are less willing to pay for (or tolerate) speculation.
- This results in money pouring out of speculative stocks, combined with stampede selling, which has brought share prices down well beyond realistic levels
The result is that oversold stocks have a two-fold upside:
- Their business can pick up from an operational perspective (meaning they make more money each quarter as they execute on their business plan). The stock's price will likely follow the results higher.
- Overall market speculation can return (slowly and given time) resulting in an increase in share prices.
This is a great opportunity for cash that is on the sidelines to be invested. With all the chaos, fear, and panic, you'll be robbing people as they throw away their stocks.
To bolster my opinion, here are the facts of what to expect:
- The VIX will settle down, as it always does
- The market and the economy will recover over time, as it always has in the past, and as it always does
- Speculation will return to the markets, as it always does
And, as always, stocks and sub $5 shares that pass Leeds Analysis (http://www.pennystocks.com/html/picks/penny-stock-picks/) will be very likely to outperform other investments. This is true in spite of the current chaos in the markets, but even more so especially because of it.
If you can have patience and be greedy both at once, I can't think of a better investment strategy in this market environment. Be greedy as you scale into the bargains, and have patience as they recover and balloon your worth.
