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Exaggerated Forecasts As A Contrarian Signal

When markets correct dramatically, as stocks have done since the beginning of the year, the cynical trader side of me comes out in force. I am often tempted to try to pick the bottom, but I will generally not act until I sense a shift in tone amongst the commentators in the business media. For the first 5-8 percent of the decline the usual suspects can be heard reassuring us in smooth voices…”This is just a normal correction and is, in fact, an excellent buying opportunity” they say, before listing tech, healthcare and consumer discretionary as sectors to buy on this “dip”. I don’t know why it is always those three, maybe that that is what they are taught to say at talking heads school or something, but it invariably is.

Once we reach the 8-10 percent decline area and eventually push through 10 percent as we did on Wednesday, the tone begins to change. What we hear then is that this is a “…fundamental revaluation…” or some such thing and the phrase “The decline may have further to go…” that suggests, while trying not to instill panic, that a collapse is imminent. Eventually, and this too hit the U.S news on Wednesday of this week in a report from RBS, somebody goes full on doomsday. In the RBS case the advice to customers was to “sell everything” except high quality bonds. For traders looking for an entry point that is like music to their ears.

It is not that we have definitely…

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