Buy Stocks When Others Are So Fearful

by: Mark Thomas

At, we're contrarians by nature, but we also try to wait until sentiment is at extreme positive or negative levels. We think we reached one of those points last week and now want to counter or bet against that sentiment and go long stocks aggressively. We did this last week for trades that lasted only one-to-two days and were rewarded nicely. However, this time, we are looking at holding our new positions two-to-three weeks or longer.

The standard negative market consensus got to us by the end of last week that you couldn't go into the three-day weekend with any open positions. Basically, the view that you had to be "crazy" to have any exposure to the financial markets and the potential risk outweighed any possible reward of owning equities. Naturally, since a vast majority of market players believed the same thing, they will be proven wrong and stocks will open higher Tuesday. I was reviewing financial shows from last week and to my surprise, I discovered some important things that give insight to how stocks may trade going forward:

  1. The negativity of financial media coverage right now is slanted to about 90% negative compared to 10% of stories that are positive.
  2. There are few real optimists on stocks and the media has trouble finding some to go on the air.
  3. The damage from the cumulative negative coverage and fallout from Facebook was more extensive than most market participants realized.
  4. Institutional investors are much more pessimistic than individual investors are right now.
  5. Individual investors are more negative than the AAII sentiment survey reflects.
  6. Last week, there were open comparisons to Lehman Brothers in the fall of 2008, a significant financial system disruption and a subsequent credit crunch.
  7. Negative, Negative, Negative financial news coverage everywhere all the time.
  8. We just watched an interview where the guy was resolutely bullish and the reporter kept hitting him with negatives and seemed stunned it didn't phase him or get him to hesitate or cover his bases. We understand reporters are supposed to play the devil's advocate, but you could tell she was kind of startled he stuck by his bullishness.

The financial media has now taken this to a point of ridiculous and silliness. So I'm making a pronouncement that after two-and-a-half years of Europe's problems affecting my decision making, from this point forward it is almost irrelevant in my trading and investing. The reason it is irrelevant is it has finally got to the point where market participants have now integrated it into their investing mentality. Yes, they will still cover it endlessly and speculate until the cows come home, but unlike the general consensus, I think it is going to have less and less of an effect on financial markets.

The peak of the crisis was last August when stocks fell 20% and gold soared to levels not seen since. You will notice that was when we were at a peak in the unknown of how events might unfold. Since then, while events have gotten worse, their effect on the markets has become diminished. We want to scream out to the Financial press and, as investors like Susan Powter in the 1980s, used to say: "Stop the Insanity!"

Here are some facts that as an investor or trader you just have to face:

1. The European crisis will drag on in fits and starts for probably three to five more years.

2. So adjust your investing and when the pendulum swings too much to the negative or positive side, bet against it and unless you're wrong on the fundamentals, stick with your plan.

3. In markets that are so driven by psychology, while they are more volatile and tough on your nerves, they are still some of the easiest ways to rack up small gains.

That's right. It is actually a good thing that events in Europe are approaching a point where some more decisive action is taken. It might be disruptive, it might shake the markets, and it might even cause a credit crunch. However, the level of negativity and fear has approached levels where even as events unfold we can still probably make profits in stocks. This has actually become silly now for investors and traders in the US to be reacting to a poll, election or statement made by a European politician or monetary authority, and for investors being whipped around by risk off and on macro trades by hedge fund types.

I'm tuning out all the "noise" going forward and buying the stocks that I like when the prices become attractive and then selling them when I can make a profit, and will then repeat the process while everyone else goes back and forth on their emotional roller-coaster. I'm also changing my planned holding period form 2-3 days to more like 2-3 weeks or more.

So on Tuesday morning, my subscribers and I are going to buy stocks aggressively again. I'm going to deploy 65% of my 100% cash position in stocks in the first hour. I will then look to deploy additional cash on pullbacks. Since there are fewer stocks that are attractive than last week, I will be buying five stocks instead of 14.

My largest and newest position will be Boeing (NYSE:BA), which is 10.65% off its high and whose business is very solid with the only negative being the strengthening dollar. I like the same casinos: Pinnacle Entertainment (NYSE:PNK) and Las Vegas Sands (NYSE:LVS). In the more cyclical area, I like Norfolk Southern Railroad (NYSE:NSC) and Cooper Tire (NYSE:CTB) and rubber. Later in the week, we intend to be 100% invested and are hoping to buy stocks like CBS Corporation (NYSE:CBS), EOG Resources (NYSE:EOG) and CSX Railroad (NYSE:CSX).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BA, PNK, LVS, NSC, CTB, CBS, EOG, CSX over the next 72 hours.