You are currently browsing the daily archive for June 27th, 2009.
You hear all types of catch phrases and sayings in this business but two of them have stood out in my mind over the years:
-Social mood and risk appetite shape the tape
-The market will do everything within its power to do exactly what you don’t expect it to.
I firmly believe in both; the second probably more than the first. You’ll watch a stock that misses on earnings and EPS trade higher due to “proposed cost cutbacks” while another that beats on earnings & EPS is shorted when they issue cautious guidance. You shake your head. It just doesn’t make sense. Nor has it made sense the last few months when, with rising unemployment and an increasing Federal deficit, the market rallied on higher commodity prices. Prices that weren’t being driven by demand, but by a lower US Dollar. The phrase *green shoots* came out of nowhere trying to convince us all that we had bottomed and sunny times were ahead. Irrational exuberance plain & simple. So where do we go now?
1. Well let’s break it down one by one. According to Robert Prechter from Elliott Wave International, social mood (its intangible influence according to socionomics) shapes stock market trends. Mood changes first, that’s why trying to predict the markets by following the news will usually leave you puzzled. But what is the mood now? Are we still believing the *green shoots* tossed about by the media? Is fear growing? Are people still buying? Again from Robert Prechter ” Mood change comes first, and attempts at reasoning come afterward.”
2. Then there’s what I call the wagging dog theory. Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do.
Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions. Note: Many would now argue there is a leader now called government sachs and we’ll look to their direction, tails wagging.
