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Stocks: Why Following the Crowd is Usually a Big Mistake

Millionaires show poor market timing

We've seen it time and again: The investment crowd often hops aboard a financial trend just as it's about to end.

Government itself is actually a case in point. Here's what the August 2007 Elliott Wave Financial Forecast said:

[In July], The Elliott Wave Financial Forecast discussed governments' knack for committing to a trend when it is finally ending. A front page article in the July 24 issue of The Wall Street Journal titled, "Governments Get Bolder in Buying Equity Stakes," confirms the strength of this very dependable sell signal.

Just two months later (October 2007), the stock market registered its historic high.

Overseas buyers are another major chunk of the investment crowd. That group was also ramping up their purchases of U.S. stocks back in late 2007.

Corporations are likewise part of the herd.

Let's fast forward to 2015, and read what our August 14 Short Term Update had to say just before the worst part of the recent selloff:

Selling pressure was exhausted on Wednesday (Aug. 12), when stocks declined sharply early in the session but rallied to erase all or most of the early-day losses. The most astounding aspect of that day was [that] much of the stock being bought was not by individual investors or by institutions, but by companies themselves. A unit of Goldman Sachs that executes share buybacks for clients had its busiest day since 2011. ... Companies are bad market timers.

Indeed, our independent analysis indicated that the stock market rally was ending. Here's a chart that the August 14 Short Term Update showed [wave labels available to subscribers]:

DJIA Weekly Chart

By the end of the week that followed, the Dow and S&P were down nearly 6%, while the NASDAQ was down nearly 7%.

Here's a weekly S&P 500 chart from August 21:

S&P500 Weekly Chart

But even as the selloff was underway, still another group was hopping aboard what they thought would be a continued uptrend.

Millionaires may be richer -- but they aren't any better at predicting stock market moves than the rest of the population.

The latest Millionaire Investor Confidence Survey, from Spectrem Group, shows that millionaires became more bullish on the economy and markets just before stocks fell into correction territory in late August.

According to the survey, which was conducted between Aug. 14 and Aug. 20, millionaire confidence during the month rose to its highest level in 11 months ....

CNBC, September 2

As we know, the market timing of these millionaires could not have been worse.

 


Read our free report: Pandemonium in the Stock Market
Updated with new charts and analysis

No longer is extreme volatility contained to Greece or China. The massive waves are here in the States, just as our analysts predicted. Learn what's behind the recent market chaos. Read excerpts and see eye-opening charts from Robert Prechter's Elliott Wave Theorist, The Financial Forecast and our Short Term Update.

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This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: Why Following the Crowd is Usually a Big Mistake. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

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