Wednesday, March 26, 2008

Explaining Public Bearish Sentiment



The game of financial markets functions to extract wealth from a majority of the players, and most of the public investors have now taken sizable losses and taken on extremely negative attitudes. They are probably wrong.

Public Crowd Holds Mostly Trend Followers

Trend followers represent those who tend to arrive “late to the party”. As the market peaked in 07, risk considerations did not exist for average investors; and now, as general volatility takes a breather, nothing but despair and misery. Numerous investors had liquidated stock positions taking relatively large losses, while professional traders began to cover short positions for profit.

By the time moms and pops have expressed strong downside, cataclysmic sentiment; the festivity of liquidations would have reached almost at an (perhaps short term) end. Naturally, the least uninformed investors take the hardest hits, and get out near price bottoms. Now that a large segment of the panic selling volume has been exhausted; what next?

The Liquidity Game Repeats

With the currently softening selling pressure, and the Federal Reserve continuously injecting liquidity, the short term trend of the general stock markets will likely stay on the positive side. Repeated throughout financial history, bargain hunters commence raiding as downside forces ease. With lessening selling and increased demand, price tends to drift upwards.

This happens with every liquidity cycle, yet the masses of public investors still behave as anticipated. Many still hold on to the dream of going from rags to riches from “picking the right stocks”, unaware of its irrelevance with logical, profitable stock trading.

Playing the Game Logically

Yes, it is damn scary right now to feel bullish, since no certainty exists within the financial markets. Despite that, the 2008 election, historical liquidity cycles, and overwhelming public “fear” had always lead to a positive expectation of the equity markets, however unlikely it may seem. Keep in mind however; a positive statistical expectation indicates a higher-than-50% probability, not absolute certainty.

Thank you for reading!

1 Reflections:

PS Thoo said...

Until US financial sector starts to post more encouraging results, i am afraid the looming credit and financial crisis will continue to haunt us all, bid by bid!

What Federal Reserve is trying to do is encouraging but to expect them to be the magic mob may be asking too much!

By the way, thanks for visiting my blog the other day.. All the best!