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nature abhors a vacuum, and i'm stepping in for mark brown. i miss him
doing the heavy lifting...
this "research" is pure yakamashi. everyone knows markets over and under
shoot. soros has written a whole book obfuscating this very obvious fact.
read the crowd, etc. and you'll get the same stuff. yada yada yada.
in this piece i see nothing that tells you when to pull the trigger. the
sum total of all market participants in pricetime (b.s. way of saying price
and voume in time) tells you all to need to know. the rest of it is just
blowing smoke up your own dugan.
there. i feel better. where the heck is mark when we need him?
jh
-----Original Message-----
From: Gentle Ox [mailto:enchant@xxxxxxxxxxxxxxxx]
Sent: Wednesday, April 04, 2001 7:12 PM
To: omega-list@xxxxxxxxxx
Subject: Psychology Cycle
FYI...Interesting Posted on the Behavioral-Finance group and I have
permission
from the author to post it here... Stephen
The Psychology Cycle
It has been a while since I have posted an update, but so far I have
not have had a compelling element to issue an update, my projections
regarding a further DOW slide still stands. We have had a brief rally
late March as the DOW attempted to cross 10000 again, but the attempt
failed leading yet again to another disappointment. The technology
warnings continues at an alarming rate with virtually all the
technology stars, Internet stocks, B2B stocks, networking, fiber
optics, semiconductors and wireless all warning.
The parade of warnings stands to a contrast to apparent stable shape
of the economy, manufacturing picked slightly and retail sales
holding fine, while consumer confidence revered its decline.
The contradiction has a simple explanation in my mind, it is Investor
Psychology, the market through out history has gone through
psychology cycles from ultimate optimism to rock bottom despair,
those cycles hold some connection to the economic cycle, but the
volatility is of such an extent that both cycles seems hardly
related. For example: between 1950 and 1959, the S&P500 earning
growth stood at 16% over that entire period, while the S&P almost
tripled in value*, another striking example is the fact that between
1929 to 1932 the S&P index fail by 81% while real dividends fail by
only 11%. Also between Jan 1973 & December 1974 the S&P index fail by
54% with only 6% drop in dividends during the same period*.
The above is just an example of how the volatility of the market can
go a long way regardless of the underlying fundamentals, the
volatility can go either way from an extreme upside like the
sevenfold in crease in stock prices between 1920 to 1929, compared to
a 3 fold increase in the S&P index earnings*.
At this moment in history I feel we are entering another period of
overreaction following a period of another opposite overreaction,
both periods can be regarded as an example of the psychology cycle
unfolding in both directions.
Based on a survey between I conducted between Feb 2001 to April 2001
of 82 investors, 90% said that they consider fundamental analysis
(50%) or technical analysis (40%) as the most important factor in
their investment decisions. Both camps stand to be disappointed if
the history stands as a guide, hence the market is not reacting to
fundamental or technical factors but rather to a prolonged form of
investors psychology turf that will lead to further declines as
investors gradually escape the carnage, while causing more carnage in
the process.
Having said that the NASDAQ seems to be approaching a bottom, the
NASDAQ is close to a 70% decline from its inter day high of 5132 in
March 2000, but the fact that we are near a bottom does not mean that
we will start a rebound in the near future, the market can remain
stuck within that range for months to come.
I still hold that the DOW should dip under 9000 to 8500 before we can
have a sustainable upside in the market.
It might be odd as a suggestion, but I think the best way to analyze
the market those days is to hire an army of psychologists specialized
in mass psychology, since the stock market appears to be a continues
real life experiment of individual behavior regarding uncertainty
within a group of people with similar conditions. Some might argue
that EMH justify the way the market does react, but many have
questioned the value of EMH, Robert J. Shiller book "Irrational
Exuberance" present some strong justifications against EMH.
According to an article by Pierre Belec on Reuters, Belec referred to
magazine covers as perhaps a good market indicator, Belec is
referring to a one way to measure market psychology.
Humans in nature are irrational agents that get carried away one way
or another regardless of the underlying investment fundamentals,
according to my survey between Feb 2001 to April 2001, out of 72
investors 63% reported that psychology was the reason why they lost
in the stock market rather then a default in their analysis.
It is not my intent to justify behavioral finance in this article, as
there are many experts much better qualified to deal with that
question then I do, it is my attempt is to apply the behavioral
concept to the market today and come out with a useful prediction to
where the market is heading. Fortunately, so far I have been right on
my analysis for the last 6 months, but I still need a longer time
frame to take my approach seriously. The coming few months will be
interesting, as the divergence between the market and the real
economy becomes more pronounce, the concept of a psychology cycle
might gain more attention.
Nawar ALSAADI
04/04/2001
*. Figures taken from R.J Shiller book "Irrational Exuberance" 2000.
http://www.geocities.com/Nawaralsaadi/Nawarmain.htm
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