Bandwagon Traders: How To Stay Ahead Of The Herd by Chad Shoop, The Sovereign Investor.
Growing up in North Carolina there is one life-altering decision you have to make at a very young age — UNC or Duke. I was only about eight when I made my commitment to being a fan of Duke basketball. Since then, there was no turning back — I stick with them through the good and bad times.
Of course, you have those bandwagon fans, who jump from one winning team to the next as the season unfolds.
The crazy thing is we see this kind of bandwagon mentality on Wall Street. And if you know what to look for, you can use it to your advantage when trading…
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The March jobs report sent the bandwagon traders scrambling on Monday to adjust their positions. The predominate view on Wall Street was that the weak jobs report would force the Fed to delay its first interest rate hike, which bodes well for income-generating stocks.
And it’s this sector where you will find bandwagon fans pouring into this week.
But now is not the time to follow the herd and buy. In fact, if you’ve been following my advice to load up on stocks with a nice dividend during the past several months, you will be sitting comfortably as those securities benefit from an influx of cash.
Doom of the Bandwagon Fan
There are two basic types of investors in the market: Those who jump on the trend (bandwagon fans) and those that are bullish or bearish regardless of the trend (a Duke fan).
I am not saying the due diligence isn’t done for each fan base, but essentially, traders are betting on their favorite sports team.
Those that have been betting on Duke (long-term bulls and bears) for the past 10 years are almost guaranteed to bet on them again. This is easily predictable and not much help when it comes to trading.
It’s the bandwagon fans in the market that create opportunity whenever market-moving events such as the March jobs report arise.
However, there is one huge caveat — you DO NOT want to be a bandwagon fan.
Bandwagon fans are the pigs in the widely known Wall Street phrase, “Bulls make money, bears make money, but pigs get slaughtered.”
That’s because they are the ones that chase profits wherever and whenever the next great investment opportunity supposedly arises.
There will be times when profits are made, as in the income-producing stock frenzy they are in now. But in the end, when the markets take a turn for the worse, it will be these bandwagon investors left holding the bag. As the market euphoria that appears just before market peaks and troughs creates a mirage of the next greatest investment trend, it will end up being one of the worst. These bandwagon traders are getting in too late, and sadly, they’ll be among the last to get out.
Instead, you want to be ahead of the trend before the bandwagon masses view an idea as the next greatest investment. In doing so, you position yourself for profit-taking opportunities as traders jump on the tail end of the newest trend, pouring fresh cash into the trade to push it higher, or in the bearish case, pulling their money out of a sector to shove it lower.
In our case, many traders are finally coming to the realization that low rates are here to stay.
Ahead of the Herd
The fact that extremely low rates are going to be around longer than anyone else anticipates is the philosophy that I, and our investment director Jeff Opdyke, have written about so often.
The Fed’s hands are tied by massive amounts of debt and the temporary dollar strength.
The reality is that the March jobs report, as decrepit as it was, is not going to alter the path of the Fed: The Fed’s path is already set. Whether it raises rates in June, July, September, October, etc. is not all that important. What’s important is that this interest rate hike will be minimal and your hunt for yield will not be alleviated in any way.
It’s my Duke-fan bias in the markets today.
The beautiful thing is that the markets have been trying to price in a normalized interest rate hike — hence the recent sell-offs in income-producing stocks and the strong dollar. Once the markets realize low rates are here to stay, they will rush back into these assets, boosting valuations and generating greater profits in your account.
That’s the power of bandwagon fans — they move markets.
But their attention span is incredibly short.
Once new data shows the Fed may raise rates earlier, they will shift to another glorified topic — leaving their profits minimal while you reap the big rewards of being early.
It is the time to hold the yield strategies we have been recommending.
Sit back and let those annoying bandwagon fans put cash in your pocket. (Go Duke!)
Editor, Pure Income