Market is 80% psychology and 20% timing

Mar.18, 2008 in Market Outlook, U.S Hot Stocks

I can’t give you a percentage but I would rank investment knowledge at least 75%. In the hypothesis of market efficiency…one would consider that the market has incorporated all news to determine future value. We understand that this is a null hypothesis do to the fact that market psychology impacts that market via heuristics and framing. In other words, in the study of behavioral finance we are aware that emotions of greed and fear can adversely effect the market in a bear trend and also affect the market on the high end…as coined by Al Greenspan “irrational exuberance”. It was no surprise today that the Fed was going to lower the fed rate at least .75. In the market efficiency hypothesis…we knew a one point reduction should occur and this was of course priced into the market..yesterday…..Basically, it only gave us a 26+ gain yesterday….don’t recall the exact gain. Today, we see a 400+….believe me, not based on the fed action…more so on the lack of bad news and some positive earnings from investment houses.

Ask yourself, if this truly a reaction of the trend changing direction (Dow Theory). A few facts from Robert Rhea for greater situational awareness and then you decide. 1) The primary trend can never be manipulated; (2) The Dow has three movements…let’s consider today’s movment a Secondary reaction

Primary Bear Markets: Bear markets is a long downward movement of the stock market which is interrupted with important secondary reactions called rallies. The bear market will not end until stock prices have been properly discounted for the worst that is going to occur. There are three principal phases to the bear market:

The first phase is the realization that the investor has purchased shares based on their inflated value. There was a belief of a continuing bull market and now the investor is losing hope.

The fundamental health of the nation is at risk. Decreased corporate earnings power and the reduction of dividends are an indication of of the second phase. The Fed Reserve will attempt to create the “soft landing” with easing of the money supply, however inflationary risk may occur.

The third phase is caused by the distress selling of securities regardless of their value. The investors are seeking a safe haven in cash and willing to sell securities which are of sound value but depressed in price.

So what was today’s reality. Yes, you cannot beat the Fed….basically, the Fed has made it clear that they will intervene to stop a depression. But, can the Fed stop a depression….and isn’t it more likely that we should expect a depp recession. We haven’t seen Phase III yet!