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Heads-Up: Bullish Consensus Alert

The weekly survey of the number of people who are bullish, neutral or bearish corn, wheat and beans is released Wednesday morning.

With about 60% of the normal votes already placed, the numbers look like this:

Corn 83% are bullish

Soybeans 74% are bullish

Wheat 82% are bullish

The theory of Bullish Consensus is that same percentage of market participants have taken market positions matching their opinion.

We are not saying the high is in; what we are saying is the market is about to have a major correction based upon bullish consensus analysis. Our longer term outlook is new highs are still ahead.

Think about it:

Do you want to be the last person to buy or the first person to sell? In other words, if everybody except you who ever trades soybeans has already bought beans, do you want to buy beans? Or do you want to sell beans?

Keep in mind that 10 to 15% of the market participants will stay neutral or bearish and will never be buyers when the market is very strong.

If you have not read the Joe kennedy Story, read it now so you will thoroughly understand the technical factor called Bullish Consensus (Sentiment). Read about Joe Kennedy:

How An Eight Year Boy Saved the Kenney Fortune:

Bullish Consensus

Bullish Consensus is the measure of how many market advisors are recommending a long (or buy) position in a given market. This is also known as “Contrary Opinion” and “Bullish Sentiment.”

On a day-by-day basis, bullish consensus should not be a major influence on your estimate of a given market situation, but in years when a prolonged trend has attracted more and more traders, bullish consensus is a major tool to help one decide when the top (or bottom) is at hand.

Open interest is the number of contracts on the books (at a futures exchange in this case) that must be off-set with an equal, but opposite, transaction at some future date.

Joe Kennedy, the father of the 35th president of the United States, as a young man, was a highly motivated to amass a fortune. He was educated about business management and married the daughter of Boston’s mayor, which facilitated his business growth. Prohibition of alcohol became law in 1919 and presented another opportunity for Kennedy to expand his successful business enterprises by providing whiskey to those willing to pay high prices for illegal spirits. Kennedy became a savvy investor in stocks and commodities. He made another fortune in the booming stock market of the 1920’s.

In the 1920’s, stocks could be bought on a slim margin, meaning a few dollars of cash could be leveraged to buy $100 worth of stock. People who had never heard of stocks were persuaded by stock brokers to use their life savings to buy stocks on margin. The stock market exploded in the late 1920’s, and Joe Kennedy became one of the richest men in America by 1929.

In the midsummer of 1929, some 300 million shares of stock were “owned” by being carried on a slim amount of “margin money.”

There was a day in the third week of September, 1929, when Kennedy, as usual, was headed to his office building in downtown Boston with the morning newspaper in-hand. He walked into the elevator to go to his top floor office with a splendid view of the Boston skyline.

As always, the 8-year-old elevator operator boy said, “Good morning, Mr. Kennedy.” Kennedy was always polite to the boy and often chit-chatted with him. This particular morning, Kennedy was reading the newspaper headline about how the stock market had made new highs with a spectacular move the previous day.

The elevator boy asked Kennedy, “Mr. Kennedy, have you heard about the stock market? It is making a lot of people a lot of money.”

Kennedy said, “Really? Tell me about it.” Kennedy was intrigued that an eight-year-old boy knew about the stock market.

“Well, Sir, last Friday my grandma told me she had invested $20 in the stock market, and a week later that $20 was worth more than $500! Can you believe that, Mr. Kennedy? $500! Grandma said that is more money than she earns in six months! I had saved $5, and Grandma invested it for me on Monday. I have already made more than $100! Mr. Kennedy, I am sure you could really make a lot of money in the stock market!”

Kennedy told the boy he greatly appreciated the investment advice and gave the boy triple his normal tip.

As Kennedy walked by his secretary’s desk, he told her to contact all his stock brokers and tell them to be in his office within the hour.

An hour later, all sixteen of Kennedy’s stock brokers were in his office. Kennedy told them to not to bother finding a chair as this was going to be a very short meeting. Then he told to them sell every stock he owned.

All of them were quick to argue with him. Kennedy quickly raised his hand and demanded silence.

He said, “Any of you who do not sell my stocks by noon today, I will fire you and find a broker who will do what I tell them to do. Now get out of here and get to work!”

On October 18, the market went into a free-fall. The wild rush to buy stocks gave way to an equally wild rush to sell. The first day of real panic, October 24, is known as Black Thursday. On that day, a record 12.9 million shares were traded as investors rushed to cut their losses. Still, the Dow average closed down only six points after a number of major banks and investment companies bought up great blocks of stock in a successful effort to stem the panic that day. Their attempts, however, ultimately failed to shore up the market.

The panic began again on Black Monday, October 28, with the market closing down 12.8%. On Black Tuesday, October 29, more than 16 million shares were traded. The Dow Jones Industrial Average lost another 12% and closed at 198, a drop of 183 points in less than two months from the all-time high in September at 381.

The Kennedy fortune had been preserved.

The Monday before Thanksgiving, one of Kennedy’s sixteen stock brokers came to his office. He was a pitiful sight; he was haggard, dirty, unshaven and looked like he had slept in his suit for a month.

He said, “Mr. Kennedy, I have to ask you. How did you know it was time to sell all your stocks? Of all the people I know, only you said to sell. How did you know?”

Kennedy told him about the conversation with the elevator boy.

“When an eight-year-old boy tells me he and his grandma were making a fortune in the stock market, who is left to buy more stocks? His six-year-old sister and his great-grandmother? That eight-year-old elevator boy gave me the best investment advice I will ever receive.”

All markets will eventually run out of buyers (or sellers) in the face of bullish (or bearish) news.

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