Tuesday, May 25, 2010

Groupthink and Contrarian Sentiment

By Eric Jackson
RealMoney Contributor

5/24/2010 5:30 PM EDT
Click here for more stories by Eric Jackson

It's always striking to me how consistently wrong conventional wisdom is when it comes to estimating future moves in the stock market. At the moment -- at least until we string together two "up" days for the Dow -- the mood is extremely pessimistic. The dominant view is that Europe is still in trouble post-rescue plan and that it's going to take down the rest of the world with it.

Yet, five weeks ago, investor sentiment was running at inordinately high levels. The bull run was continuing apace. You had to be in the game to be keeping up with the market's moves. We heard endless talking heads on television, spouting about the "cash on the sidelines" that needed to come into the market and be "put to work".

At the beginning of the year, you could hardly find a single commentator who liked the US dollar. The consensus was that the US was in dire shape and printing money to solve its problems. How could the dollar not continue to slide against every other currency? Well, it turns out that the US dollar is up over 8% YTD and the euro is down over 12%. People apparently forgot that the rest of the world had its share of problems too, and the US economy, by comparison, did not look so bad. I read a report today by UBS (UBS -commentary - Trade Now), saying that the US dollar is going to be a super-currency in the next 10 years, attracting investors in the way it did in the late years under Clinton and Rubin.

My point is that everything makes sense in the rearview mirror. Yet, people always seem to forget how hard it is to predict the future before it happens. They also forget how bad other people -- especially those holding the conventional viewpoint -- are at predicting the future.


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