We cannot use Efficient Market Hypothesis (EMH) to dismiss ideas offhand because we will not get very far with anything. Let me apply EMH in a case that just comes to mind.
They say doctors make more income than the average Joe, but we know that it cannot be so due to EMH.
If doctors really made more money, then other workers, being desirous of money, would also become doctors. This had the effect of increasing the supply and the surplus of doctors would dilute their earning power. They would end up earning just the average income of the population.
Well, everybody makes the same money anyway, EMH tells you, not just doctors.
The Most (Not) Hated Bull Market – Meb Faber Research – Stock Market and Investing Blog
Above doesn't seem random. It shows market sentiment, as reflected by Investors Intelligence %Bullish. The 10years following highest readings average 0.1%. The ten lowest average 17% return subsequent year.
Btw, 2014's reading of 76 is 2nd highest on record.
So, let's look at the data on its own merit.
I look at that link, and the data presented is very interesting.
Hmmm... Right offhand, I do not see a strong correlation between investor sentiment and the slope of the S&P 500 price. But the author presents the following observations.
a) Of the most recent 50 years, he picks the 10 with highest sentiment. The average return of the following years of these 10 was 0.1%.
b) Then, he picks the 10 with lowest sentiment. The average return of the following years was 17.4%.
It appears that in the other 30 years where the sentiment is not at the extreme, it does not make a good indicator. When the sentiment is high, the next year tends to be flat. But when the sentiment is pessimistic, the following year return tends to be above normal.
The author points out that the sentiment in 2014 is the 2nd highest in the past 50 years. So, should I be concerned? Looking at his data, I see that the market has 50% chance of going up or down with high sentiment. This is below par because we know that the overall average return is up.
The last observation agrees with my earlier gut feeling which I posted in a recent poll about expectation for next year return. I anticipated that the market at 2015's end will be within +-5% of its starting value.
In contrast, a poor sentiment appears to be a good "buy" signal. Again by gut feeling, I did make many "buy, buy, buy" posts on this forum in early 2009. When I bragged about it in a recent post, Lsbcal teased me about it, and I said that I only do "buy" signals.
It is really trivial. "Sell" signals are a lot harder, and I have to defer to the Oracle of New Orleans and her "Wheee" signal.
I had been thinking about cutting back my 70% stock exposure down to 50% before seeing this data. It's just my gut feeling that the market cannot keep on delivering higher and higher P/E's. On the other hand, it does not have to crash either but may just deliver an average return. I see no reason to get out of the market, but am no longer that bullish. Or I may just stay put as I have a lot of foreign stocks that have not done so well, which I would buy now if I were all in the S&P. Additionally, I think the market will be range bound, and I may look to do a bit more short-term trading, not that the latter will make me much money other than some bragging rights and a hopefully gainful pastime.
PS. I see some interesting things in that investor sentiment data that was not what most people would expect. It shows that if we call it an indicator, it is an erratic one. But then we know everything else also is.
