ROSENBERG: Bob Farrell's 9th Rule Should Have Investors Nervous Right Now

Business Insider

Despite fiscal cliff fears in the U.S. and Europe's sovereign debt crisis, investors are growing increasingly bullish.

The latest Investors Intelligence poll for the past week showed the percent of bullish investors rise from 39.3 percent to 43.6 percent. Meanwhile, bearish investors shrank from 27.7 percent, to 25.5 percent.

Glusin Sheff's David Rosenberg writes, "this is a contrary negative from a Bob Farrell Rule #9 standpoint". 

Merrill Lynch strategist Bob Farrell's rule number nine if you remember goes, "when all the experts and forecasts agree -- something else is going to happen".

Farrell's investment advice is still handy and in light of this, we decided to re-publish Bob Farrell's 10 market rules. Here is a summary with help from Marketwatch:

  1. "Markets tend to return to the mean over time" - When stock prices either plunge or plummet they will eventually come back and extremes in the market shouldn't throw off investors.
  2. "Excesses in one direction will lead to an opposite excess in the other direction" - If market moves in one direction, away from its baseline, it is also at some point going to go beyond the baseline in the opposite direction.
  3. "There are no new eras -- excesses are never permanent" - People like to say "this time it's different" but it never is. A sector can have a good long run but it will eventually correct.
  4. "Exponential rising and falling markets usually go further than you think" - A sector won't surge and then move sideways, it will correct and that correction will be brutal. 
  5. "The public buys the most at the top and the least at the bottom" - That is pretty self explanatory and is part of the reason contrarian investors with good timing can make a packet.
  6. "Fear and greed are stronger than long-term resolve" - Legendary investor Barton Biggs: "At the extreme moments of fear and greed, the power of the daily price momentum and the mood and passions of “the crowd” are tremendously important psychological influences on you. It takes a strong, self confident, emotionally mature person to stand firm against disdain, mockery, and repudiation when the market itself seems to be absolutely confirming that you are both mad and wrong."
  7. "Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names" - Farrell believes that broad momentum in markets is hard to challenge, but when this is centered on a few stocks, many are being overlooked.
  8. "Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend".
  9. "When all the experts and forecasts agree -- something else is going to happen" - This is exactly what Rosenberg is referring to above.
  10. "Bull markets are more fun than bear markets".


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