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Ever heard the term "bandwagon fan"? Take the Pittsburgh Steelers, for example. They're the best football team in the NFL from where I'm standing.
But the Steelers were a steamrolling, unstoppable NFL "dynasty" in the 1970s. The Pro Football Hall of fame notes (and I can confirm), "Eight consecutive playoff berths, seven AFC Central titles, and four AFC championships from 1972 to 1979. The Steelers became the first team to win four Super Bowls and the only team to win back-to-back Super Bowls twice."
But the wheels fell off in 1980. The team went through a 26-year championship drought, until 2006's Super Bowl XL when – don't you forget it – the Steelers became the first wildcard team in the NFL to win three playoff road games and the championship. I stuck with 'em for those long years, but who knows how many fans went elsewhere.
Of course, those bandwagon fans came running back after the 2006 championship. You never want to be called a bandwagon fan because, let me tell you, Super Bowl XL felt a whole lot better for people like me, who'd stood by the team for those 26 dark years.
No wonder one of my 10 Commandments of Trading is: "Avoid running with the crowd." In other words, stay off the bandwagon unless you're actually in the driver's seat.
The 10 Rules That Put Me on the Road to Riches
I started out as a failed engineering major at Ohio State. At one point after graduation, I was using food stamps to provide for my family. Flash forward a few years and – boom! – I'm pocketing thousands of dollars a week on the stock market.
And I have my 10 commandments of trading to thank.
That's why today, I want to tell you all about one of the most important ones. Think of it like this: Always avoid a bandwagon stock… unless, of course, you're the one driving.
You always want to be in the driver's seat of the bandwagon. You don't want to be the person that's running behind, trying to catch the tail of it.
It pains me to admit that I have been that guy. (As a trader, not a football fan, mind you.)
You know, the one who waited too long to buy a stock and then jumped on the bandwagon after it was too late. The stock hit a rock, and the wagon skidded off the road.
If we're honest with ourselves, we've all done it. But my message here is don't do it. Not anymore.
Watch the bandwagon stocks, sure. The ones that everyone is talking about – Uber Technologies Inc. (NYSE: UBER), Zoom Video Communications Inc. (NASDAQ: ZM), Beyond Meat Inc. (NASDAQ: BYND), you name it.
But instead of jumping on, position yourself to cash in on the "groupthink." When everyone else piles onto the bandwagon, it'll pull the stock up. So, that's when you sell.
It works the other way, too. When everyone else is selling, it'll push the stock down. That's when you buy.
Buy low; sell high. It's the oldest rule in the book.
Now, it's easier said than done. I understand that. Whether you're waiting around 26 years for a Super Bowl win or holding a stock amid overwhelmingly negative sentiment, going against the grain's never easy – if it were, everyone would be a millionaire trader, right?
But it doesn't have to be hard, either. So much of what you hear and read about a stock is just noise; block out the noise, and focus like a laser on the play at hand.
I'll tell you exactly how to tell if the stock you're watching is a bandwagon stock.
Let's say you like a stock, and when you turn on CNBC, everyone's talking about it. Sounds good, right?
Wrong. That should be a flashing yellow warning – proceed with caution!
That's when the usual stock chatter gets louder and more crowded. You'll probably see the share price climb, too, but rest assured: It won't be for long. When 85% or more of analysts are rating a stock as a "Buy" or "Strong Buy," that's not when you should get in.
And if you've held that particular stock "since before it was cool" to own that stock, it's time to formulate an exit strategy. This bandwagon will crash, and it'll be sooner rather than later.
Everybody likes to be a 3.5% return portfolio manager, wearing their dad's suit, feeling comfortable. That's where the groupthink comes from. But they're deluded. Everyone else around them is buying the same thing!
It's human nature – and you should never bet against human nature.
When you're dealing with the stock market, it's difficult to think independently. We're trained to watch all indexes – the S&P 500, the "FAANG" stocks, and so on. But like George Orwell might say, that's groupthink; you can never outperform a group if you're part of it.
If you just buy the most popular stocks and sit and watch your money move with the market, then you're always going to be stuck in the group. When the market goes down 10%, you also go down 10%. You can't time your entry or exit.
The bottom line? Just avoid running with the crowd. One way to do that is to use technical analysis, like I do for my paid subscribers. But you've got to use it correctly; even technicians can fall victim to groupthink.
How to Be a Bandwagon Driver
Take the relative strength index (RSI), for instance. Conventional wisdom holds that a reading above 70 is overbought and a reading below 30 is oversold.
But overbought can always become "more overbought" and oversold "more oversold." (See Commandment IV.) You should use RSI in the context of other indicators to get a better idea of whether the momentum you're seeing – up or down – actually has potency.
I like to see a stock above a rising 50-day moving average that is in turn sitting above a 200-day moving average. I like to gauge market expectations, particularly short interest (see Commandment VI.) When there are too many active short sellers, a "short squeeze" can ignite; that's when all those short sellers have to "cover" their shorts and buy the stock in droves – which, of course, drives the price up.
If you're on the right side of a short squeeze, you'll be among the relatively few people to cash in on it. You'll be driving a bandwagon with very few, but very well-compensated, passengers.
That's just one of the ways you can use the 10 Commandments of Trading to become a better, wealthier trader. And make sure to keep your eyes on your inbox; my team and I are putting the finishing touches on some specific ways you can use the 10 Commandments of Trading to your great advantage. You should see it hit in the next day or two…
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Strikepoint Trader and contributes to Money Morning as the Quant Analysis Specialist.