Survive Economic Turmoil
Last entry, we discussed #1 of the 5 ways to survive economic turmoil, entitled “Buy the Rumor, Sell the Fact.” Today we move on to #2, Investor Sentiment, and display how understanding that it is a contrarian indicator can set you up to profit in times of economic turmoil.
1. Buy the Rumor, Sell the Fact
2. Investor Sentiment
3. Limiting Losses
4. When to Sell
5. Be Wary of Averaging Down
The current investor sentiment refers to how optimistic (or pessimistic) the majority of investors are feeling. In other words, what beliefs and expectations do the majority of people or penny stock investors have at the current time.
If everyone thinks the penny stock market is about to crash, that represents highly negative investor sentiment. If the world seems to be stampeding to throw their money into penny stocks, and even your great-grandmother is phoning you with her latest penny stock pick (similar to the Dot-Com bubble days), then that’s highly optimistic sentiment.
Now, here’s the important part – Investor sentiment is a contrarian indicator.
The greater the percentage of people that are optimistic, and the more optimistic those people are, the more likely the market or penny stock will drop or crash. If everybody expects shares in ABC Inc. penny stock to go up, they are highly likely to go down. If 90% of investors believe that XYZ Corp. penny stock pick are going to collapse, then those same shares are probably going to go higher.
This mainly happens because people act on their beliefs. Traders buy into penny stocks they expect to go higher, and that buying pressure pushes the shares up. When everybody thinks that the same penny stock will increase in price, they buy. Once they’ve all bought, and that penny stock buying pressure disappears, the shares are usually overvalued and due for a fall.
The same holds true in reverse. When the penny stock market crashes, and everybody is running for the exits, the mob mentality selling drives the prices lower. Eventually the last panicking investor has sold.
At that point, anyone you talk to will have a highly negative outlook about investments. That’s when negative sentiment has reached it’s peak, and therefore traders are most likely to be wrong. There aren’t any more sellers, because everyone’s sold. They all still believe there is even more downside. Really all that’s left are highly undervalued penny stocks that are about to increase in price.
Use investor sentiment to your advantage. It takes a lot of courage to buy penny stocks when everyone else is selling, but the harder that becomes for you, the more likely that you are making the right move.
Stay tuned for the next penny stock entry, where we discuss part #3 of 5, Limiting Losses.