About 4 months ago I wrote about the Canadian stock markets with a dual message: the Canadian retail investor was panicking and cashing in their mutual fund. According to contrarian analysis, this is a good thing because the less knowledgeable and weaker market participants are usually wrong - especially when they react like a herd.
But I also wrote “Caution, Caution, Caution”, saying that even so, I was worried that the market looked heavy. My reasoning was based on the percentage of stocks above their moving average.
My thinking was that although the sentiment would probably put a floor on the market, things could get a bit dicey. Did they ever!
In this case, it pays to be lucky! I was right in being cautious but wrong in thinking that the market would soon rebound from any weakness. After falling, the index has been wrapped up in a tight trading range for the past two months. To be honest, it shocked me to see it so weak in the aftermath of the July sell off.
I wanted to layout my thinking to illustrate that relying on any one indicator, however sound or logical it may be, is dangerous. Timing the stock market is an extremely difficult thing to do and if you’re going to get lucky, it pays to have many tools in your toolbox.
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