Romanticizing that you are a contrarian when you are indistinguishable from consensus can’t be good.
The quote above comes from Adam Parker, Morgan Stanley's U.S. equity strategist and director of quantitative research. He set the Internet abuzz this past weekend with a research note in which he wondered why he keeps getting questions from money managers about why stocks rose in the past two months and what will happen next. Most, he said, preface their queries by noting that they are contrarians. They then proceed to ask the same questions:
What is this price action telling you?
What are other investors asking you about?”
How are other people positioned?
What’s the current sentiment?
The belief among many managers is that their perspective is unique or contrarian, while everyone else’s is mainstream, seems to be surprisingly common.
Therein lies the paradox of looking at sentiment data. Everyone thinks of themselves as above average, just like the children of Lake Wobegon. Of course, believing yourself above average is a very average thing to believe.
Let’s use Parker’s comments as a reminder about why it is only when sentiment data hits extremes that it has much use as a signal for the above-average investor.
Recall our earlier admonitions on the topic: