Revisiting Bob Farrell’s rule #9

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I published “Bob Farrell’s rules for investing” and “More on Bob Farrell’s rule #8” a few days ago, and these posts attracted a large number of readers, obviously in search of some guidance at this juncture in the markets.

Today, I consider rule #9, “When all the experts and forecasts agree, something else is going to happen”, in the context of the current situation.

Firstly, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, quoted a CNBC poll of Tuesday showing that 90% of Wall Street economists believed the recession had ended. “It is highly unlikely that 90% of the economics community can be right on the same thing at the same time,” he said. Also, a Bloomberg survey showed that the consensus sees real US GDP expanding at annual rate of at least 2% for the next four quarters, leading Rosenberg to warn that a lot of good news was already ‘out there’.

Secondly, the latest survey among investment advisors by Investors Intelligence shows that the proportion of bulls has just moved up to 49.4% – the highest level since December 2007. The bears dropped to 21.3% – the fewest negative advisors since October 2007. The spread of +28.1% is regarded as a negative from a contrarian point of view.

“It does appear that we have some groupthink to consider – at this stage virtually everyone is bullish on the market. This could mean that we are not going to get a lot more buying power to propel this equity rally over the near-term as it means we have a lot of good news priced into the market,” concluded Rosenberg.

Be careful out there.

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