Panic Rooms Are Not For Stock Investors
Eric Gemelli forecasted the current economic cycle we’re in back in 2001. His advice: don’t panic
By Eric Gemelli
The following is a reprint from Eric Gemelli’s syndicated finance column from May 2001. A quick glance at a Dow chart from that time shows he predicted the bottom of the Dow with incredible precision. We are reprinting it here because it is believed we are in a similar pattern and the information will be useful to you.
By Eric Gemelli
The bear market has created a lot of anxiety, but there is good news around the corner.
Many investors have been brainwashed to think that knowing the future movements of market is impossible. The fact is markets consistently demonstrate repetitive patterns.
Investors like to think they make independent decisions based on rational thought and research. They miss the fact that millions of others are reaching the same conclusions at the same time in response to the same data. This is very similar to your teenager: they all want to act different together. It’s a type of mob psychology.
So, the reality is that people in a bull market see a nice profit and lock it in. This involves selling the shares, which causes the price to dip, giving another group that was sitting on the sidelines a chance to get in. This creates a strong surge as the people afraid of missing out start buying. And the cycle goes on.
The same happens in reverse in bear markets. The value of the Dow or a particular stock holding will cross an invisible line drawn in the sand, possibly by hundreds of thousands of people, so the selling begins. Another group of investors think the lower price represents a buying opportunity, so they start buying and rallying the market, which gives the people that wished they had gotten out a chance to do so. The result is a new avalanche of selling as another invisible line is the sand is crossed.
The good news is the mob is almost done selling (in a historical sense). Corrections move in sets of threes. If you look at a chart of the Dow, you can see a big move down; that’s one. There was a move back up, also broken into three basic moves; that’s two. I believe we are a little over half way through the move down. The Dow will probably approach 8000 before it finishes, maybe even breaking through it.
There are a couple reasons the funds can’t or won’t use this information. Sometimes a prediction of a future movement is wrong; then the forecaster loses credibility.
The biggest reason mutual funds don’t respond to an obvious correction is the charter in a mutual fund doesn’t allow for selling short when it is called for. Fortunately, most financial planners react to a year and a half bear market by preaching diversification again to minimize the cost of the next correction. (I’m speaking ironically, because traditional diversification didn’t save your returns when the market sheds 40%.)
Why?
It’s part of the cycle.
