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How do you know when to buy a stock?
Every analyst has their own secret sauce. Some look at fundamentals, which analyzes a company’s financial health, growth outlook, and valuation.
Other people use technical analysis, which uses patterns and trends on a stock’s chart to predict where shares are heading.
While I use both fundamental and technical analysis, there’s another factor that’s a key ingredient in my secret sauce…
…and it’s called sentiment analysis.
Have Fun Staying…
Do you remember what the crypto market was like in 2021?
Bitcoin was trading as high as $64,000. Dogecoin was up 7,000% in a few weeks. And NFTs were minting new millionaires every day.
You had billion-dollar brand Twitter accounts speaking to each other in crypto slang…
…Tom Brady had “laser eyes” in his profile picture…
…and people were saying things like this:
This “irrational exuberance” in the crypto market dovetailed perfectly with the top in crypto prices:
It was the “sentiment peak” for crypto. As a rule, when loads of people – particularly retail investors – are bragging about how much money they’re making, it usually means a sentiment - and price - peak is near.
This is the absolute worst time to buy. In fact, to be a great investor you need to buy when everyone is fearful and indiscriminately selling their investments.
Finding The Sentiment Low
Let’s contrast the sentiment peak we saw in 2021 to the – likely – sentiment low we saw in 2022.
Imagine you’re back in June 2022. Bitcoin is down 70%, with many altcoins down -95% or more.
And then a few months later it’s revealed that FTX – the world’s second largest crypto exchange – was a Ponzi scheme.
At that point, crypto prices fell even further. Google searches for “crypto is dead” hit a multi-year high:
And even Jim Cramer proclaimed that it’s “never too late to sell” your crypto.
And then only a month later, many cryptocurrency prices surged hundreds of percent…
When sentiment was at its most bullish in 2021, it was the worst time to buy crypto.
And when sentiment was at its lowest in 2022, it was the best time to buy crypto.
But this lesson applies to far more than crypto…
Look For “Uninvestable” Assets
Sentiment analysis applies to stocks, crypto, real estate, and every other investment under the sun.
Billionaire hedge fund manager Howard Marks says that when something is called “uninvestable” it’s typically the best time to buy that asset.
As nobody wants to buy something, you get the best deals.
We saw this recently with everyone’s favorite retail stock, Tesla (TSLA). Tesla stock rose over 1,328% from the COVID lows in March 2020. People who had gone “all-in” on Tesla were crowing about how they were retiring early…
…and Tesla’s CEO Elon Musk was even named Time’s Person of the Year:
When everything seemed to be perfect for Tesla, this was the sentiment top in Tesla’s stock price as the stock fell -70% over the next 12 months…
…before bottoming when sentiment was once again seemingly at its lowest point last month after his foray into Twitter hit a fever pitch:
This begs the question: what is currently at sentiment extremes?
Be Fearful When Others are Greedy
Going in 2023, stocks, bonds, and crypto were all near sentiment lows.
So it’s no surprise to see a short-term rally in all three this year:
Looking at the markets now, I’d say the three assets near sentiment peaks are European stocks…
…and, in the short-term, high-growth tech stocks (including Tesla) and crypto.
But does that mean I’m going to run out and sell all my tech stocks and crypto? Far from it, but I am less likely to buy and will sell short-term trading positions.
…When There’s Blood in the Streets
The perfect time to buy a stock, crypto, or really anything is when nobody else wants to buy it. And on the flip side, the best time to sell is when everybody wants to buy it.
These “sentiment extremes” are when you get the best bang for you buck.
But as I wrote about last month, we’re in a secular bull market that I expect to run for many more years.
And in a secular bull market, you want to own quality stocks through ups and downs.
Which is what I plan to keep doing.
Stay safe out there,
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