Sentiment Extremes

"When I address investment conferences near the extremity of a market trend, I show a dozen times in the past when extreme sentiment led to major market reversals, up and down. I show how each and every time, be it in stocks, real estate, commodities, gold, oil, tech stocks, penny stocks, mining stocks, or whatever, there was always an airtight fundamental argument for a continuation of the trend as it neared its end. An airtight argument in favor of continuation and widespread acceptance of it are in fact two signs of an approaching reversal. I also try to mention that even an extreme consensus can become larger, so a consensus is not a pinpoint signal. It's just a warning that one should always heed. If an investor won't act on a large consensus, he will be powerless against a huge one. If you are safety conscious, recognizing a strong consensus doesn't mean you must take the risk of investing in the opposite direction; but it does mean that you must avoid investing in the direction of the consensus. People in audiences often agree that my presentation is logical and a great guide to investing. But the agreement ends when I show them the markets sporting extreme sentiment now. These are the markets that investors have recently embraced, to which they finally succumbed after years of reading articles, books and websites on why the trend in force would continue. Suddenly the logic of my case evaporates in their minds. They all respond, "But X has to go up/down anyway because...." They think I'm logical about the historical evidence but simply wrong in this case. They think I'm sadly blind to the obvious forces in play. They judge the other speakers, who explain fundamentally why the trend in X must continue, as just as logical as I am but with the difference that they are right, this time. They crowd around the advocates, because their every word supports the overwhelming intensity of their own herding impulse with respect to the market in question. They concede that sentiment extremes worked in the past, and they concede that they will assuredly work in the future, but they never agree that they will work today." ~Robert Prechter, "Jam Yesterday and Jam Tomorrow, but Never Jam Today", www.ElliottWave.com, March 31, 2011.