An Introduction to Consensus Indicators
By their very nature, financial journalists are fence sitters. Financial newspapers and magazines do not ever want to be wrong in their opinions, so they present reportage within their pages that is as innocuous and non-committal as is humanly possible. Journalists' fence sitting only disappears at the end of a long trend, when the balance of opinion among analysts, investors and the press has reached a strong consensus.
At this time, the press will jump firmly onto one side of the fence or the other, presenting strong opinions concerning the state of the market and its likely short-term direction. When journalists have jumped to one particular side of the fence, astute traders climb over the fence and position themselves on exactly the opposite side. Standing huddled as a group, the journalists look at the lone trader through the rungs of the fence with smug expressions on their faces. In a very short period of time, however, the trader will be the only one with reason to exhibit any smugness once the markets change direction to his or her advantage and in exactly the opposite direction to the predictions of journalists.
Take a look at a major business newspaper one day and see how many ads you can find for certain individual investment opportunities, such as real estate, commodities or certain types of equities. Chances are you will find several ads touting the investment potential of one particular investment or another. When you notice, for example, a large number of ads for the potential for appreciation in the price of gold, the price of gold is likely to be near its top. When the advertisers get together to scream "buy," the astute trader walks very quickly to his or her terminal in order to hit the sell button.
Trading contrary to opinion is deadly effective because of the often-misunderstood axiom that much of living is based on the power of paradox. At the surface, many aspects of life and of investing, like the power of consensus trends, appear to be true and straightforward. However, as we have seen, the herd is almost always wrong, or at least late in jumping on the bandwagon. As we see time and again, both in the markets and in life in general, when the herd finally jumps aboard a trend, that trend has very nearly run its course. The individual who is able to recognize the inherent paradox in crowd behavior is best able to capitalize on the inevitability of contradictory opportunities.
Jason Van Bergen is a well known contributor to several trading publications including Investopedia.com, Forbes.com and Allstocks.com bringing a wealth of knowledge for investors and traders alike.