There is an area of the stock market that very few people talk about: Psychology. While fundamentals and technicals are important, one could argue that psychology is even more important because the market tends to fool the majority. In other words, it is important to know what the majority of people are thinking and to make sure you’re not thinking the same way. Over the last 100 years, companies have come and gone, but the human emotions of fear and greed have been the same. And guess what? They will continue to be the same for the next 100 years.
Market psychology can be difficult to interpret because there are so many different sentiment surveys and many of them often conflict. So what do I do? I talk to people and listen to market commentary. Here are a few examples:
1) Turn on financial television for an hour and listen to 10 different market opinions. I guarantee you they will mostly be bearish. You will likely hear that “a crash is coming,” this 9-year Bull Market is about to end (even though it’s not a 9-year Bull), and how investors should be very cautious right now. Even Jim Cramer says that he’s getting yelled at for telling people to stick with this market. It’s usually the opposite in euphoric environments.
2) The majority of potential clients I speak to are scared. They tell me there is no way they will put money in at these levels, and the most common phrase I hear from them is “a crash is coming.” I try to explain to them that we might be in the early stages of a bull market and they laugh at me.
3) Many random people I talk to (Uber drivers, financial trade shows, etc.) are obsessed with telling me about their short positions. When I started in the mid-1990’s, it was all about being long GE, CSCO, and other blue chip stocks. No one discussed shorting stocks.
4) Besides talking to people, you can see the fear in the put/call ratios anytime the Nasdaq drops 1%. For example, last Wednesday (8/2/17) the Nasdaq sold off after Apple’s earnings and equity put buying spiked to their highest levels in a month.
I’m not saying to never be cautious and to just blindly go long this market. I’m simply saying that it’s tough to see a prolonged correction when the majority of people are scared and expecting it. Last April, when the Dow was at 17,500, part of the reason I called for Dow 20,000 by year-end was due to the negative market sentiment. Now, I am currently witnessing the same misery which leads me to believe the Nasdaq still has 8-10% more upside from now until year-end. If you don’t believe me how negative most people feel about the stock market, go ask 10 random people and see their response. Remember, the market tends to fool the majority.
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