On The Stock Market, Kris Allen, Contrary Opinion, & American Idol

May 21, 2009: 6:05 PM CST

What does Kris Allen’s ‘upset’ victory over Adam Lambert on the finals of American Idol have to do with the Stock Market, Trading, and Contrary Opinion?  A lot – read on to find out more.

For those not familiar with this ninth season of American Idol, all you need to know is that Adam Lambert was the hands-down favorite to win this season of American Idol – it was almost accepted as an inevitability by many.  However, when the votes were recorded and the winner announced, Kris Allen – called the “underdog” or “dark-horse,” was declared the winner, to the shock of many.  As ‘mysterious’ as this seemed, it was right along the expectation of those – like myself – who are well-versed in the concept of “Contrary Opinion” or “The Unexpected” thanks to my experiences trading the stock market over the years.

For many weeks, it seemed that the judges had already crowned Lambert the winner, and one week in particular, Simon Cowell criticized Kris Allen by saying “I’ll be honest, there’s no way you can win this competition” referring to his lack of confidence when compared to Adam and other competitors.  Some even joked that American Idol was “The Adam Lambert Show.”

On the days before the winner was announced, popular ‘betting’ website InTrade.com listed Allen’s chances around 40% (Adam’s chances of winning at 60%) and actually Allen’s odds dipped to a low of 30% just after midnight prior to the competition.  Lambert’s odds hovered near 70% to 80% virtually throughout the life of the inTrade Contract.  On May 19th, the day before the finals (Wednesday), Allen’s odds of winning were roughly 25%.  Las Vegas and other betting sites gave the edge to Lambert.

The image below is a comparison between Allen and Lambert’s inTrade.com odds:

There’s many reasons Kris Allen won, and you can read them on other websites – few of which are pertinent to the stock market – but the few that are include the “Complacency” of overconfidence and theory of contrary opinion.  Perhaps Lambert supporters were certain he would win and thus did not vote as aggressively as Allen supporters – Simon warned this might happen.

So how do we tie this into the stock market?

How many times have you heard something discussed as “inevitable” in the stock market by analysts or friends, and upon taking a position, you see the market (or a stock) head the exact opposite direction than you and everyone expect?  More times than chance, isn’t it?  So much so that the game almost seems ‘rigged’ at times.

How many times will a company announce better than expected earnings but that same company’s stock will gap or trade lower upon the announcement?  I wrote a post last year addressing this topic entitled “Why Might a Stock Fall on Good News?”  I also addressed this in an intraday summary entitled “A Little Perversion Trade.”   Further, I wrote a post entitled “Confusion in the Market – How to Understand” – all of which were designed to address these ‘perplexing’ realities of the market (and life).

How many times were we told “we will not go into a recession” but we did anyway?  For a more recent example, how many times were we told (myself included) that the market is “too overextended” and will come into resistance any time now?  Yet the market continued to rally against all odds and expectations.

Markets tend to ‘bottom’ when no one thinks they can (or at least the majority can’t believe it) and top when everyone is reassured and bullish (except the professionals).  Now, this is not to say “be contrarian for contrarian’s sake” – that’s not appropriate either.

Do follow sentiment – do watch the ‘sentiment indicators’ like the Bull/Bear Numbers, AAII Investor Survey, and other prominent wide-spread surveys to see which way the ‘masses’ are leaning in the market.

The reality is that the crowd “gets it right” most of the time, but with BIG things – like tops and bottoms – the majority is almost always wrong.  And usually they’re VERY wrong.  But during a sustained bull market, the majority is generally on the right side (thus it is foolish to fade sentiment all the time).  Look for extremes in market sentiment and if your technical or fundamental indicators are giving conflicting signals – pay very close attention and stand against the crowd.

You’ll make more money in the market long-term by going ‘against’ the crowd (public opinion/’majority’) instead of ‘with’ them.  Just like you made more money if you bet on Kris Allen to win American Idol than you did if you bet on Lambert (if they were stocks, for example).  It’s extremely hard to ‘fade the public’ or go against all you know and hear to be true – sometimes with passionate emotion (by the likes of Mr. Jim Cramer and others on television).

But if you use sentiment to your advantage and learn when to ‘go with’ the crowd (when things are normal) and when to ‘fade’ the crowd (when things are “all but certain” or hyper-emotional), you’ll most likely be a much more profitable trader and investor… or at least you’ll prevent yourself from being caught off guard like virtually everyone else.

Corey Rosenbloom, CMT
Afraid to Trade.com

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12 Comments

12 Responses to “On The Stock Market, Kris Allen, Contrary Opinion, & American Idol”

  1. Matt Says:

    Corey, what do you recommend following exactly as a good sentiment indicator(s)? Thanks.

    Matt

  2. dullmind Says:

    Thanks for the post, a question, do you think this applies to the current blogger sentiment?
    Do the bloggers, regular participants, and lurkers (like me) constitute a crowd?
    Should I do the opposite of what Mole on evilspeculator does?

    Lurkers want to know 🙂

  3. Corey Rosenbloom, CMT Says:

    Haha – I have no idea what the evilspeculator does so I can't comment on that.

    But yes, there are multiple groups you can watch for sentiment. Message boards are one, blogs are another. It's best not to fade the top bloggers but it can be helpful to visit lots of blogs maybe on a weekend and try to get a consensus or look at Chart.ly for marked-up charts from strangers. Try to figure out if you see an overabundance of “The market HAS to go up from here” or something where a lot of people are 100% certain on a certain opinion – when you see that, it's a good bet that the market will do the opposite of what everyone – especially new traders – think.

  4. Corey Rosenbloom, CMT Says:

    Probably the best site to assess broad-based sentiment is Sentiment Trader. Here is a list of all the indicators they track, or that you can track yourself if you don't want to subscribe:

    http://www.sentimentrader.com/indicators.htm

    Take a look at the Put/Call ratio, Bull/Bear Poll Numbers, AAII Investor Survey, and other broad and accepted measures of sentiment, both from polls and hard market numbers (like odd-lot short-sale ratio or Commitment of Traders report).

  5. TenYear Says:

    good article ..+1

  6. Financial Spread Betting Says:

    Agree… good article

  7. americanidolepisodes Says:

    so after lambert's AMA performance, it was kris allen owning the last laugh and not adam lambert. 😀

  8. Simon Says:

    Knowing the current situation of the stock market is crucial especially if you have stocks invested in it. It is better to be up to dated to the situations so that you could know the actions to be taken if some changes in the stock market occur as to secure your stocks to lose. Today, the stock market is unstable so we need to be vigilant to the current market conditions.

    Regards,
    Gold Bullion

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    Regards,
    Gold Bullion

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  12. CFD Says:

    This has got to be one of the funniest articles that I have read.