There's Wisdom In Crowds But Madness In Mobs

Posted: Jan 11, 2019 12:07 PM
There's Wisdom In Crowds But Madness In Mobs

The market considered and reconsidered comments from Jay Powell yesterday as it seesawed in a tight range.   Finally, stocks gained momentum into the close.  The session underscores the fact there has been a shift in urgency and a growing belief the train is leaving the station.  On that note, we are a long way from everyone jumping on board, especially a lot of Wall Street firms that panicked in December lowering their outlook for 2019.

Of course, I always remind individual investors don’t watch what these firms are saying watch what they’re doing because for sure they will be buyers long before officially changing their rating and target on the market.  The question is what could lead this market higher, and the answer is Consumer Discretionary.

The sector is the second-best performer thus far but could power into the lead as two upgrades on Netflix (NFLX), including a ‘strong buy’ at Raymond James, set the pace.  The sector also includes Facebook (FB), Alphabet (GOOG) and Twitter (TWTR) (which see the biggest gains this year). 

S&P 500 Index


Communication Services (XLC)


Consumer Discretionary (XLY)


Consumer Staples (XLP)


Energy (XLE)


Financials (XLF)


Health Care (XLV)


Industrials (XLI)


Materials (XLB)


Real Estate (XLRE)


Technology (XLK)


Utilities (XLU)


Wisdom of the Crowds

I use behavioral analysis and understand crowds, but the knee-jerk belief that individual investors are always instantly wrong, but the smartest guys in the rooms of Wall Street are always right, is way off base.

On December 13, individual investor bullish sentiment bottomed at 21%, and two weeks later, December 27 bearish sentiment crossed above 50%.   That for me was a buy signal equal to a classic capitulation session in the stock market.

Since then, individual’s bearishness has tumbled to just 29% while bullishness is still a cautious 38%.  Over the years, I’ve watched individual investors become “more chill” during market swoons than the experts that act like they’ve never faced market adversity (some never have in a professional capacity) and start screaming “the end is near.”

The irony of the experts dissing the crowd is these same crowds decide the winners and losers in real life as consumers.  When a lot of people have packed a theater on the opening night of a highly anticipated movie, there is an air of excitement and optimism and even a wiliningness to suspend disbelief.   If someone in the theater screams “fire” and sets off a stampede, then that crowd becomes more akin to a mob (the distinction is one driven by fear, the other by anger).

The moral of the story is, there is wisdom in crowds but madness in mobs and they are distinctly different.

Portfolio Approach

I’ll reiterate comments from yesterday that we might close some positions that have moved too fast rather than allowing them to pullback too much.  I like the idea of a little more cash since we’ve put on several positions since I got back from vacation.

Communication Services

Consumer Discretionary

Consumer Staples












Real Estate











Today’s Session

Equities have been under pressure all morning, but not alarmingly so.  There could be an urge to scalp some of the recent gains.  Watch the financials, as many banks kick off earning season next week.  I have my own concerns.

This morning the Consumer Price Index was benign, even after taking out plunging energy prices.  The news probably doesn’t change minds at the Fed, but it’s a reminder that a soaring jobs market can coexist with moderate inflation.