Corona Del Mar, CA
Do you remember the Morton Thiokol controversy? They were a contractor behind NASA's Space Shuttle program. Yet, in the chilly clutches of 1986, they became infamous for the Challenger disaster. Here's the riveting bit: engineers from Morton Thiokol sounded alarms over the O-rings performing in cold conditions. But the bigwigs pushed the launch, leading to tragedy.
Here's where it gets jaw-dropping: The Wisdom of Crowds reveals that when many minds fuse together, the decisions often eclipse those of a select 'elite'. It's like piecing together a puzzle from fragments scattered in a stadium. Fast-forward to the Maui fires in August 2023. Beautiful Lahaina up in flames, with the death count ominously ticking upward. In the midst of the chaos, Hawaiian Electric's stock plummeting from a lofty $37 to a meager $15. It's an eerie echo of PG&E during the California infernos. The crowd's sixth sense saw it coming, and if history is a fortune teller, Hawaiian Electric (HE) could be dancing on thin ice.
The golden nugget? The crowd's intuition often hits bullseye.
That's why raw price momentum can be more telling than mere statistics like earnings or dividend yields. Why play guessing games with the Fed when price data serves up the future on a silver platter? Here's some sparkling news: my "7-Lines of Code" strategy, a gem from my best-selling tome, is signaling 'BUY' for the S&P 500.
Harnessing price momentum, it has a nice 19% year-to-date return. And guess what? It's in perfect harmony with the crowd's symphony while the funny mental gamblers have been wrong wrong wrong all year. A sprinkle of wisdom for the traders among us: When trading stock indices, allow room to breathe with your stop losses.
With SPY's quasi-stop loss stationed down at 410 (even though it closed at 442.89), the S&P 500 tends to revert to the mean, and has a long-term up trend. Clamp down too tight on those stop losses, and you might just get shaken out before the index zooms right back up.
You might have noticed I said "quasi-stop."
The Boss discovered that using a hard stop wasn't as profitable. So once the quasi-stop is hit, the strategy looks to get out into strength. At that point, it'll start mean reversion trades between SPY and TLT. "The wisdom of crowds" is like tapping into a giant brain made up of many people's thoughts and experiences.
When you pool everyone's insights, the group often nails the answer better than any one expert. So, why not listen when you've got a whole crowd doing the thinking for you? We use the wisdom of the crowds all the time when selecting a hotel, buying a book, deciding where to eat...you do use star ratings right? Unfortunately, a star rating service wouldn't work on stocks. There's just too much influence from price itself. AAII sentiment data proves that mood about the market is affected by price movement...that's why AAII sentiment data never gets selected by The Boss in our internal testing. Neither did a lot of things actually.
That's why listening to folks who don't test their assumptions is hazardous to your wealth.
More from me soon...
P.S. I've been to Maui many, many times. Lahaina was one of my favorite places to visit. God speed to those affected by the fires.