I have been trading, studying and writing about the stock market for over 30 years now and one thing I have learned to appreciate more and more is sentiment analysis. While there are a number of sentiment tools that are measurable, one of my favorite indicators is one I have come to call the Average Joe indicator. What it boils down to is when plumbers, cabbies, school teachers, etc. start talking about investments, it is time to worry.
One example came during the internet stock boom of the late 90s. I was pretty sure it was over when one of my professors was talking about putting some money into a tech mutual fund. When I asked him which one, he replied “one of those go-go internet funds.” He didn’t even remember which mutual fund he bought, just that it was an internet related fund. That was in the fall of 1999 after I had gone back to school to finish my degree. I was a non-traditional student in that I was 32-years old and the branch manager of a bank at that time.
In 2000, I started my career in investment publishing and had learned a great deal about sentiment analysis in that first position. So In 2011, I was pretty sure the silver rally had run its course in the first quarter of that year after the Average Joe indicator was triggered. Over the course of a few weeks, my father in law and the guy that cut my wife’s hair were both talking to me about silver investing. At that time my wife and I had been together for 19 years and my father in law had never talked to me about investing, so when he starts telling me about investing in silver, the alarms were going off.
Looking at the marijuana investing craze that is going on now, it may be coming to an end soon. The industry faces regulatory issues as it is and there is some question as to how they can handle their finances since banks are regulated to not accept deposits from illegal business operations. But these aren’t the reasons I say the boom could be over. That comes down to my brother asking me about it a few weeks ago. I take care of his 401K for him and log-in and make allocation changes for him as he has asked me to do. But he has never asked me about how he can go about investing in anything before.
Now the Average Joe Indicator is sounding again, only this time it is the overall market that is a concern. In the last week, a connection of mine on Facebook has boasted about his gains in the market each of the last three days. I have spoken to this gentleman a number of times about investment strategies and such, and I can tell you that he doesn’t know how to short-sell stocks, so he is only making money on the long side.
If that wasn’t enough to cause concern, my wife came home and told me that she overheard the operations guy and the IT guy at her job talking about how well the market was doing and how well their investments were doing. My wife knows about my Average Joe indicator and she spent 20 years in the investment management industry before making a career change, so she understands the concept.
With the main indices at or near all-time highs and many weekly and monthly oscillators showing overbought levels, a certain amount of caution should be taken. The Average Joe Indicator isn’t a quantifiable indicator, but if the past is any indication, a top in stocks is likely near.