Beware The Lemmings of Wall Street

This week, we witnessed the launch of a new exchange-traded fund (ETF) that epitomizes the art of contrary investing. I’m not necessarily advising you to put your money into this fund, but I do recommend its underlying contrarian philosophy.

More about this ETF and what it signifies, in a minute. First, I want to explain why you should always resist the lemming-like behavior that’s all too common on Wall Street.

Human beings are susceptible to blindly following conventional thinking until it takes them right off a cliff. That’s why I give great credence to contrary investing, a method that entails bucking the herd mentality.

Contrary investing is the art of going against the crowd and the pressures of conformity. This mindset works in any sort of investment market because human nature is constant everywhere. The sad fact is, most people (and that includes investors) are lemming-like followers, not independent thinkers.

A “contrarian indicator” is a form of market signal that tells an investor it might be an opportune time to do the opposite of what the majority of investors are doing.

The media serve up a steady diet of contrarian indicators. The insatiable need of 24-hour financial channels for content virtually assures that anyone who can communicate at least a semblance of competence can get on the air. Unfortunately, there is virtually no follow-up on the advice conveyed.

Many of these media “experts” are carnival barkers who are more concerned with ratings than your portfolio. When they all start plugging the same dubious investments (e.g., the now-bankrupt cryptocurrency exchange FTX), I’m reminded of the Dutch tulip bulb mania of the 17th century.

The madness of crowds…

You’ve probably heard the snarky jokes about doing the opposite of whatever CNBC’s Jim Cramer advises viewers. Now, it’s no longer just a joke. Retail investors can pursue that strategy.

On March 2, a new actively managed fund came into existence: The Inverse Cramer Tracker ETF (CBOE: SJIM) that allows investors to bet against the host of CNBC’s “Mad Money.”

The fund is the creation of Matthew Tuttle, CEO of Tuttle Capital Management. The inverse fund’s prospectus states that it’s “an actively managed exchange traded fund that seeks to achieve its investment objective by engaging in transactions designed to perform the opposite of the return of the investments recommended by television personality Jim Cramer.”

The filing goes on to state:

“The Fund’s adviser monitors Cramer’s stock selection recommendations throughout the trading day as publicly announced on Twitter or his television programs broadcast on CNBC, and sells those recommendations short or enters into derivatives transactions such as futures, options or swaps that produce a negative correlation to those recommendations.”

On the same day that it launched the SJIM fund, Tuttle Capital Management also launched The Long Cramer Tracker ETF (CBOE: LJIM), an actively managed ETF that goes long anything that Cramer recommends buying.

Matthew Tuttle explained it best, in the March 2 press release that announced the two funds:

“Love him or hate him, Jim Cramer is a polarizing figure. We want to give investors on both sides of the debate a way to express their views, and create products that can provide diversification to traditional portfolios.”

In like a lion…

In the meantime, as March gets underway, bullish sentiment is returning to Wall Street. The main U.S. stock market indices closed higher on Thursday.

On Friday, the indices extended their gains and finished sharply higher as follows:

  • DJIA: +1.17%
  • S&P 500: +1.61%
  • NASDAQ: +1.97%
  • Russell 2000: +1.35%

Stocks posted a weekly gain, as the benchmark 10-year Treasury note slipped below the key 4% level.

The S&P 500 and the NYSE Advance/Decline Line are both above their 200-day moving averages, whereas the CBOE Volatility Index (VIX) has fallen below 20. These are all bullish signs.

Investors are looking past their worries about inflation and rising interest rates, to focus on a bevy of better-than-expected fourth quarter corporate earnings results that came in this week.

We’ll see if the optimism fades when the Federal Reserve makes its next interest rate decision later this month. As the following chart shows, the federal funds effective rate currently hovers at 4.57%:

The betting on Wall Street is that the Federal Open Market Committee (FOMC) will hike rates by 0.25% at its next policy meeting March 21-22. This expectation was underscored by comments on March 2 by Atlanta Fed President Raphael Bostic, who said that he “still very firmly” supported boosting rates in modest quarter-point increments.

Bostic’s assertion assuaged investor fears that the FOMC might impose a larger hike of 0.50% this month in reaction to recent hotter-than-expected inflation reports.

Putting contrarianism into practice…

The new inverse Cramer fund is an interesting development, but there’s an even better way to put contrarian thinking to profitable use: our premium trading service, the Weekly Cash Machine, helmed by my colleague Dr. Joe Duarte.

Dr. Duarte leverages a “fear-based” algorithm that uncovers instant cash codes that generate extra income, regardless of the mainstream consensus on Wall Street. In fact, Dr. Duarte’s methods actually thrive on market insanity. Get the details by clicking here.

John Persinos is the editorial director of Investing Daily.

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