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You’re reading this because you want to make money in the markets.
And there are hundreds of ways to accomplish that goal. Some people buy and hold index funds. Others buy “blue chip” or dividend paying stocks.
But a controversial strategy is to “time the market” where investors buy and sell stocks at what they believe are the most advantageous moments.
And while this isn’t a strategy I recommend, there is one way to do it relatively consistently.
But I’m warning you, it’s easier said than done…
…because to do so you must go against human nature.
A Walk Down Bank Run Memory Lane
What would you say was the biggest market event so far in 2023?
For me, the regional bank crisis takes the cake. The US experienced two of its largest banking collapses in history:
Many people expected this to lead to a full-blown banking crisis, which is why the iShares US Regional Bank ETF (IAT) fell to a three-year low:
The crisis was spawned by aggressive interest rate hikes by the Federal Reserve. Yet the central bank has kept raising interest rates, including another 25-basis point hike last week:
While IAT crashed at the onset of the crisis, the ETF has started to rise steadily the last few months, implying investors are optimistic about the outlook for regional banks.
The Baby and the Bath Water
Despite the Fed continuing to raise rates - which started this entire crisis - the iShares US Regional Bank ETF has surged +30% off the lows.
You may be asking yourself how that’s possible, as logic would dictate higher interest rates should make this crisis even worse.
It all comes back to something called market sentiment. During the thick of the regional banking crisis, everybody was dumping their shares in regional banks like it was going out of style.
The thinking was the US financial system was on the verge of a “contagion” event. These failing regional banks would lead to failing big banks, and so on, and so forth.
But that didn’t happen. With the benefit of hindsight, it’s clear investors were simply panic selling their regional bank stocks.
It was a sentiment low for regional banks. And as we’ve seen time and time again, these are the times you get the best deals.
Run Towards the Sound of Crash Stocks
I am far from a perfect investor.
I make mistakes all the time. But I tried to listen to my “sentiment spidey sense” during the regional bank crisis.
To paraphrase billionaire hedge fund manager Howard Marks says, “when an asset is called univestable it’s typically the best time to buy that asset.”
And regional banks certainly fell into the “uninvestable” category earlier this year.
That’s why I opened a small position in Charles Schwab (SCHW) (you can read my original buy recommendation here). While not a bank, they had been caught up in the regional bank sell off and saw their shares crash -43%:.
While I was shaken out of the position early, the thesis was right on the money as SCHW shares are up +30% since…
…which is another example of the power of sentiment investing.
We’ve Seen This Pattern Before
Sentiment analysis applies to stocks, crypto, real estate, and every other investment under the sun.
We saw it in the cryptocurrency market late last year. Crypto was already in a bad way in mid-2022. Bitcoin was 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…
And today, bitcoin has surged over 100% from the post-FTX collapse lows:
See the pattern here? When sentiment was at its lowest for crypto, it was the best time to buy crypto.
And when sentiment was at its lowest for regional banks, it was the best time to buy regional banks!
Going Against the Grain
Sentiment investing is very difficult.
Your instinct when the world is seemingly collapsing around you is to sell your portfolio positions and head for the hills.
But to be a great investor, you need to run towards the sound of crashing stocks. These types of “liquidation events” are when you find the best deals in the market.
And in my career, it’s where I’ve made a name for myself (and a lot of money).
Stay safe out there,
Robert