Farrell's 'Groupthink' and the Current Market Outlook

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 U.S. 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.

Rosenberg says:

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.

Be careful out there.

Comments

[Nick36:]

Groupthink isn't always wrong. You can find many examples where groupthink has been right and also many example where groupthink has been wrong.

Groupthink is where a few leaders get a lot of followers. And these followers stop thinking for themselves. They follow blindly their leaders.

A good way to judge whether groupthink is likely wrong or right is to look at the thinking itself and consider whether it's reasonable in the context of the situation or not.

And I'd say that the present groupthink led by the Fed isn't reasonable. Because the main cause of the present recession hasn't yet been resolved in any significant way. US consumers are still deeply in debt. And for many of them the situation is getting worse and not better. Because many of them are loosing their jobs and unemployment benefits. While their debts remain.

Aug 13 08:34 AM

[E Nuff Sed:]

A cursory analysis of Seeking Alpha articles and comments make it quite clear that bullish groupthinkers and not a large group in this neck of the web.

Aug 13 09:23 AM