Market Psychology 101

by: Gary Tanashian

As a public financial market writer, I receive a lot of communication from readers. This actually makes keeping my own impartiality more of a challenge as the incoming viewpoints are an ongoing potential (I don’t let them become actual) whipsaw over cycles and market phases, coming as they do from inflation and deflation proponents at times of stress to a particular ideology. For instance, at the moment my financial windsock blows in a direction that shows gold bugs are absolutely terrified, commodity touts have given up, deflationists are brave and everyone else is on edge.

Now, I am just the dumb chart guy, but the purpose of TA is to quiet this noise and simplify. As you know, we lost the ‘blue sky’ breakout in the HUI over 610 and had to adjust. As I hold the line on the HUI supports noted in Friday’s email updates, I am subject to input that almost seems to implore me to stop being bullish.

But I am not bullish; what I am is refusing to panic in the face of demanding tones and increasingly bearish articles forwarded to me almost daily. Where were these gloom pieces when it was time to be bearish? These are nothing more than trend following articles no better than the inflation/bull stuff I had to filter a half a year ago.

Fine, I am positioned for the bear with enough ‘shorts’ to largely offset the damage to the gold stock items in the portfolio. This makes me strong. Each player needs to know what makes her strong and then get some of it! The advice has for weeks been have cash, patience and await opportunity.

[Shorts were subsequently unwound on 10/3 and 10/4 in favor of cash for risk management]

But opportunity is only going to come to those who have earned it, and in the modern financial markets, earning it requires a sensible plan that can be cross referenced with logical fundamentals, technical analysis and a psychological makeup that resists the herding instinct. We continue to track the reasons that gold mining is due to be a fundamental performer in an economic contraction environment, and it continues to track the technicals from both big picture (ongoing and unbroken bull market) and near term perspectives (holding support).

But the subject today is psychology; media-fueled pressure and group psychology assault the individual in an intense and relentless onslaught while reinforcing whatever the hell trend happens to be in force.

Dial back to last spring; the trend was one of inflation, the hysteria was inflationary and the 30 year T bond’s yield was threatening an upside breakout with the commodity bull horns front, center and selling ‘the metals’ and other commodity items to trend followers.

The tout was most intense just as the major trend was about to change to one of economic deceleration, contraction and deflation. Hello? There is a reason I have called this the most important chart in the world and why it shows up so often in the newsletter.

(Click chart to expand)

Now we are either at (green dotted) or quite possibly, heading to (solid green) the
opposite condition from the inflationary hysteria of early 2011. The Fed has announced that it will shift bond buying from the short to the longer end of the curve as the economy decelerates and inflationary pressures (as gauged by traditional measures) ease. We have expected this deceleration ladies and gentlemen. Have we not? The continuum shown above certainly has.

The chart also shows that the Fed’s desperation, in buying long bonds, is about to help distort the channel that has held for the last decade, in breaking yields below the green dotted line. That distortion is a picture of the widening desperation and lack of more credible tools for our policy heroes to use.

I realize that many (and hopefully most) readers are and have been guarded, while awaiting the shift toward contraction, deflation and the opposite pole of the continuum. The safest place to be has been in cash. People like your writer – probably in part because I am your writer, wishing to show portfolio stability – hold key positions (rather than robo-trading) but manage risk all around them.

Others however, who do not have a weekly macro market newsletter to write should value their cash while realizing that patiently holding cash in a falling asset price
environment is the least stressful way to await opportunity.

This gets back to psychology, as unfortunately, most market players are greedy when everyone else is greedy and fearful when everyone else is too. This is elementary, I know; but the title is ‘Psych 101’ and it is stunning how often even seasoned pros fall victim to herding behaviors. I think it is germane to the human condition. When I was younger, I used to wonder why I was such an oddball. But now I value this trait for all it is worth.

Please do not interpret that I am playing bull contrarian wise guy because truth be told, I am as concerned as the next guy. Why else would I watch the gold stock sector daily? It is not for fun, it is to keep a constant check up on the latest parameters and alert the people who buy my newsletter immediately upon any changes to these parameters.

This week, after another hard down on the HUI and continued rolling over of broad markets and commodities, I have no new changes to the parameters and therefore, no new news to report; certainly not of a broken gold stock case or a bullish case for the broad asset markets for that matter. Make provisions, contingencies and manage risk. But also understand that everybody (except active deflationists) is scared right now.

As of this writing (9/30/11) I am short crude oil, oil and gas services, junk bonds, QQQ, SPY and even silver in one account. Ref. the email updated from 9/28/11: “The upshot? Most of the bull potentials have already been expressed in the short term, in my opinion… etc.” This, due to strong broad market upside on Monday and Tuesday.

I am sure most everybody wishes they were too. If our parameters trip the ‘wrong way’ on the HUI this week, I may add back the DUST (short gold miners) position as well.

But here’s the thing; it has not happened, and no amount of insisting that it will happen can change that. It is best to leave that for the bear heroes that have replaced the bull heroes of last spring. Risk is rising for our furry friends as well.

[HUI weekly parameter - almost to the penny, remained INTACT on Tuesday]

We will just wait for the continuum to play out, like it always has. If the continuum ends, it is Prechter time as a deflationary collapse will be irresistible.

Meanwhile, we ontinue on the path of being long a real bull market (gold) and intermittently short other markets, as needed. The key is to still be standing and to be strong when opportunity manifests from today’s fear. So let’s get to the analysis…

We continue on to extensive analysis of gold in ratio to other markets, nominal technicals on gold, the sentiment structure in gold and silver and of course, the gold miners. The gold-silver ratio and USD showed a picture of why we held that October would be a month of opportunity for those who survive the tumult. There was a lot more of value in this letter as well. My confidence is pretty high in the current environment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.