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Optimism is Back. Should You Buy Stocks Now?
Consider an Elliott wave forecast before you take the plunge.
The DJIA has been stuck in the low 9,000 point range for most of August, but the talk of "a new bull market," "a V-shaped recovery," and tributes to the Federal Reserve for saving the day are getting louder. The optimism is back, as this headline demonstrates:
Investors Pile Into Stocks as Risk Appetite Jumps, Merrill Says -- Money managers jumped back into equities this month and reduced their holdings of cash as risk appetite returned to levels not seen since the last bull market, a Merrill Lynch & Co. survey showed. “People have had to admit that the global economy is improving. A lot of investors missed out on the March rally, which had become increasingly painful, so they have had to throw in the towel”. (Aug. 19, Bloomberg)
The Daily Sentiment Index...recently recorded back-to-back readings of 88% bulls, the highest extreme since the October 2007 peak. The weekly Investors Intelligence Advisors’ Survey sports the highest bullish percentage since December 2007... The AAII survey of individual investors shows the highest percentage of bulls (51 percent) since...early May 2008.
If you randomly poll 100 average investors and ask them whether this sentiment is bullish or bearish for stocks, 99 of them will probably answer "bullish." They're conditioned to think good news causes stocks to rally and bad news sends them lower.
And that's exactly why most investors buy at market tops and sell at bottoms.
But you don't have to be a part of that statistic. Elliott Wave International's subscribers were prepared for this rally. We even gave it a name, in Elliott wave terms: a Primary-degree wave 2. This won't mean anything to you if you're new to Elliott, but consider this forecast that EWI's president Robert Prechter made in his April 2009 Elliott Wave Theorist (excerpt):
What to Expect in Wave 2 -- Wave 2 could carry the Dow as high as 10,000... Wave 2, regardless of its extent, should regenerate substantial feelings of optimism. At its peak...the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us. Be prepared for this environment; it will be hard for most investors to resist. The perverse result of wave 2 will be to get people even more heavily invested than they already are, just before wave 3 starts.
A bit of history on Bob Prechter's recent market calls:
- On July 17, 2007, with the DJIA near 14,000, Bob issued an urgent Elliott Wave Theorist, telling subscribers that the top was in.
- 18 months later, on February 23, 2009, with the DJIA cut in half, he sent another Interim Report to subscribers, telling them that the bottom was likely near.
So when Prechter speaks, I, for one, sit up and listen.
On August 5, ahead of schedule, Bob published a new issue of his Elliott Wave Theorist -- this one explaining the current market environment. An ultimate contrarian, in a recent interview Bob said that, "You have to buy stocks when there is no reason to buy them."
Find out why Prechter thinks now is not of those moments. Read his new, August Elliott Wave Theorist online now, risk-free.