What do you think is a stronger emotion, fear or greed? Let’s answer that by looking at a few examples…
Imagine a stock broker who was doing his job in during the tech boom around 2000. His job was probably pretty easy, right? From his perspective, everyone wanted a piece of the pie. Typically, when the general public hears of a fast and easy way to make money, they’re usually quick to jump on the band-wagon to make a quick buck. However, the stock broker still has to make an effort (sometimes with outbound calls) to get people to invest with his company.
Greed may be a strong emotion, but I think the fear of loss is much greater. Here’s why…
Now think about that same retail investor, who was probably uneducated in market dynamics, when the bubble started to burst. As prices were falling faster than a lead filled balloon, who do you think was being “proactive” then? My guess is the stock broker didn’t have to make any outbound calls. As a matter of fact, I’m willing to bet his phone was ringing off the hook with people trying to pull their money out of the market.
I think this S&P 500 e-mini daily chart from February 2010 up to May 2010 gives a solid example in the differences in fear and greed. You’ll notice how it took almost 3 months for the market to gain about 180 points, yet it only took 8 days (about 9% of the time) to lose around 90% of the gains.
Let’s break this down from a perspective of two groups: professional traders and retail traders. In my blog post on 05/05/10, when the DOW had a massive drop of around 1,000 points, I show where the retail traders got net long the market right around the same time the pro’s got net short the market. If you look at the COT Net Position indicator over time, you’ll see a pretty steady inverse correlation between the pro traders and retail traders. It’s almost like the money gets transferred from the retail traders to the pro’s.
As professionals, I think one of the best things we can focus on is what the other 98% are thinking… and do the opposite. If we can recognize the actions and perceptions of the masses ahead of time, we can usually stay on the right side of the market.