Of Fear and Financials

“The only thing new in this world is the history that you don't know.” - Harry S Truman

Just as day follows night and spring follows winter so, too, does investor psychology follow the seasons of emotions from greed to fear and back. Behavioral finance rules and the Efficient Market Hypothesis remains a hypothesis. Loss aversion over risk aversion.

So, to help investors in need of a little timely perspective, these  two charts reflect the ever reliable greed/fear cycle quite nicely.

Investment Strategy Implications

The contrarian in me believes in the Baron Rothschild saying, "The time to buy is when there's blood in the streets." It is an investing example of President Truman's quote and a testament to the reliability of the greed/fear cycle. Therefore, since the epicenter of the current fear cycle is the Financials, I can't help but notice the recent relative strength in Financials in the midst of outright panic.

Comments

[venividivici:]

This may not be the silliest article i have ever read on SA but it would probably get into the Grand Final. My advice to you Vinny is go for it cos you aint scared. And why don't you start with Lemon, sorry Lehman. They just released their latest quarterly results and they claim they ONLY lost $4 billion and they plan to sell some of their stuff real soon.WOW!!!!

2008 Sep 10 12:20 PM

[Jake2:]

The author has said as little as possible in as few words as possible. Or zero = zero. Brilliant. Reader, pass by.

2008 Sep 10 01:36 PM

[Jason Rines...:]

The stages are interesting and I agree with them. But I do strongly disagree with the author it's time to buy financials. If based on his own opinions, the market is in panic mode then why buy now? It does makes sense to buy between Despondancy and Depression. This author just made a fool of himself by stating some basic market pyschology in a good graph but then advocating buying now.

2008 Sep 10 02:40 PM

[Vinny Catalano:]

This is something that my three amigos seems to have missed - the full blown panic phase may not be upon us.

As I commented on back on May 12th ("The Economy is Spelled with a W"), an economic double dip in 2009 (most likely the second half) is my highest probability US economy call. That means that a stock market decline anticipating the double dip may not occur until we are in the new year.

If so, then the mini panic we are experiencing right now along with the fact that corporate earnings are still more than decent (aided by global growth, mostly from emerging markets) plus the valuation levels are more than reasonable (unless you believe in the Bad or Terrible scenarios I outlined last week - "The Looming Valuation Adjustment Process") might be the rationale for the high cash levels (including those at hedge funds) coupled with very negative investor sentiment readings to = a stock market that most likely surprise to the upside this fall.

If this occurs, then those sectors and industries that are exhibiting the best relative strength should lead the way up.

This is what a contrarian like me must do to buy low in the expectation of selling high.

2008 Sep 10 03:43 PM

[Big Al45:]

Or buy low and sell even lower.

2008 Sep 10 05:01 PM

[Schweizer:]

The head and shoulder pattern on the monthly Dow measures down to 9000, and is highly relable. You haven't seen panic at all yet.

2008 Sep 10 06:06 PM