If we’re going to consistently profit from everybody being wrong so often, I think it’s important to understand why.
Why is everyone always so wrong?
It all comes back to the humans.
It isn’t just the “retail” investors, who are the last ones to show up at the party. It isn’t the economists, or Wall Street’s sell-side or even the hedge funds who get it all wrong.
It’s the humans.
Humans Make Poor Choices
All we’re doing here is betting that humans will continue to make poor choices when their stress levels are elevated.
It’s as simple as that.
And when are humans’ stress levels elevated this day in age? When money is involved.
Or, worse, when money AND politics are involved.
It all comes down to where the humans are getting their information, and what motivates them when they’re buying and selling stocks.
If an investor is listening to an economist, we know they’re thinking about backward-looking information.
And we know too, based on a lot of history, that this data has little to no bearing on the direction of the stock market.
Economists ignore the forward-looking discounting mechanism of the market in favor of old, stale numbers from the past.
It’s not a coincidence that economists are so consistently wrong, particularly when they’re at extremes in their consensus views.
Meanwhile, Wall Street sell-side analysts must travel in herds. And that presents a big problem for their end-user – the investor.
Let’s say 25 firms cover a stock, and 24 rate it a “buy.” If you’re going to be the one analyst with a “sell” rating, you better be right!
If you’re not, and you’re the only one of the 25 who got it wrong, you’re going to be out of a job.
And you won’t be able to afford little Timmy’s private school, or Mrs. Analyst’s botox and Porsche, or your fancy vacations and country club memberships.
At the end of the day, is it worth it to go out on that limb, even if you feel strongly about the stock?
No. It’s easier to go with the crowd. If the crowd is wrong too, you don’t stand out as an idiot.
And if you don’t think that’s how the world works, think again.
This is exactly how the world works, especially on Wall Street.
Sell-side analysts consistently revise their estimates higher during bull markets, and consistently revise their estimates lower during bear markets.
In both environments they’re chasing prices as they get left behind.
The individual investor wonders why “professionals” are wrong so often.
They’re only human, and they behave that way. And human behavior is consistent cycle to cycle.
Many investors make their lives even more difficult by tuning in to financial TV and/or following newspapers and magazines for market insights.
These are the worst things you can do. We know for a fact that there is no group with more conflicts of interest than the media.
Understand, they are in the business of trying to convince you to keep consuming their content.
They are not in the business of making money in the market. And they are certainly not in the business of helping investors make money.
Their job is to brainwash you into believing their “panel of experts” is what they describe.
They want to convince you that if you’re not watching, reading or listening, you’re “falling behind.”
Not only are the consumers of this content NOT being informed.
In fact, the investors who watch, read, and/or listen to mainstream media are consistently the most misinformed.
It gets even worse when you bring in the politics.
These days, the liberal media has people believing the stock market is in shambles, with almost 90% of Democrat voters believing the stock market is going to fall over the next six months.
The right wing agenda has its flaws as well; Republicans were bearish like that in 2023 and 2024.
They’re all guilty of this, some more than others depending on who’s in office and what they believe will keep their audience coming back.
We Play To Win
We’re only here to make money.
“You play to win the game,” said former NFL player and coach Herm Edwards. “You play to win. When you start telling me it doesn’t matter, then retire. ’Cause it matters.”
As much as I dislike the New York Jets, this quote has stuck with me for more than 20 years.
You play to win the game.
To translate it into the stock market parlance, you trade and invest to make money.
That’s what we’re here to do.
Sell-side analysts are in it for themselves. Economists are more lost than ever, and I won’t pretend to understand what’s happening there.
People in the mainstream media are here to take your attention off that goal. Entertainment is not education.
Financial TV and print journalists make a lot of noise – so much you can barely think above it.
The more confused you are, the more you’ll come back for their comfort… is their business plan.
Don’t let them do it.
Price Is the Only Thing That Pays
Where should we go to stay caught up on what’s important?
Price.
Price will tell you everything you need to know about stocks, interest rates, commodities, cryptocurrencies, or any other assets.
We want to take what actually pays and then find divergences where the media, economists, and analysts are telling you the opposite.
When the stock market is rising to new all-time highs but asset managers and hedge funds are underweight is when we want to buy into the strength.
When short interest is piling up, despite the stock market ripping, we want to squeeze those short-sellers.
If the Russell 2000 has underperformed for a long time, and NOW they’re all shorting small-caps, we want to buy the small-caps.
The worst decision-makers I’ve ever met are looking to short small-caps.
And speculators are net short in the futures market… and short interest in the iShares Russell 2000 ETF (IWM) is hitting new 52-week highs.
This is all happening right now.
Gloom and doom, with constant negativity from the news outlets, particularly the liberal ones this year. Sell-side analysts are cautious.
ETF flows into equities are non-existent. Short-sellers are as loud as ever.
We’re taking the other side of the trade.
We’re betting on higher stock prices.
And we’re focusing on stocks with higher short interest.
Our strategy is simple: Whenever they say “tariffs,” we buy more stocks. We’ve done really well with Chinese stocks.
We’re buying a Southeast Asian consumer discretionary stock at the market open today.
We’ll discuss details with members today during The Divergence LIVE at 11 am ET.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs