Investors who follow trends tend to buy when the market is already on an uptrend, which is considered risky by contrarian income investors who prefer to buy low and sell high. Contrarian investors believe in buying when everyone else is selling, and sentiment readings can help determine when the broader investing herd is feeling pessimistic. One useful sentiment indicator is the CNN Fear & Greed Index, which has seven components that accurately reflect fear and greed in the market. For contrarian investors, it’s ideal to do heavy shopping when the index is in the Fear or Extreme Fear zones.
Another useful sentiment indicator is the Smart Money/Dumb Money Confidence level published by SentimenTrader.com, which measures the hubris of market participants. The Dumb Money segment consists of investors who are typically late to the party and tend to buy at market tops and sell at bottoms. The Dumb Money Confidence reading hit a low last October, signaling a great buying opportunity, while in April it only dipped slightly, indicating less despair in the market. The American Association of Individual Investors also publishes a sentiment survey, but some investors may find it less actionable compared to other sentiment indicators.
These sentiment readings are most useful at extremes, particularly during bearish periods, but at the moment they are in a neutral territory, limiting their value for investors. However, investors should be prepared for a moment of despair later in the year, as these moments tend to produce the best buying opportunities. By being ready for these low sentiment readings, investors can secure the most dividends for their dollar and not be scared off by market fluctuations. Brett Owens, Chief Investment Strategist for Contrarian Outlook, recommends staying patient and taking advantage of market opportunities when sentiment readings are low.
Contrarian investors like Owens prefer to buy low and sell high, rather than follow trends and buy when the market is already on an uptrend. By using sentiment readings, investors can gauge the mood of the broader market and identify opportunities to buy when others are selling. The CNN Fear & Greed Index and the Smart Money/Dumb Money Confidence level are helpful indicators in determining market sentiment, while the American Association of Individual Investors survey may provide additional insights for investors.
Overall, being prepared for moments of despair in the market can lead to profitable buying opportunities for contrarian investors. By staying patient and focusing on buying low, investors can secure strong dividends and not be deterred by market fluctuations. Owens advises investors to keep an eye on sentiment readings and be ready to act when the market presents optimal buying opportunities. By staying disciplined and focused on long-term income goals, contrarian investors can navigate market volatility and achieve their investment objectives.
