Sentiment Speaks: Are You A Lemming?

|
Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Avi Gilburt
Summary

There are many reasons people give as to why a market moves.

Most reasons are quite superficial.

It's time to think about the market a bit more honestly and deeply in order to have a better understanding of how to invest.

There are many reasons people give as to why the markets move up or down. Yet, the great majority of the reasons are quite superficial and fleeting.

I think Bernard Baruch put it best when he said:

All economic movements, by their very nature, are motivated by crowd psychology. Without due recognition of crowd-thinking ... our theories of economics leave much to be desired. ... It has always seemed to me that the periodic madness which afflicts mankind must reflect some deeply rooted trait in human nature — a trait akin to the force that motivates the migration of birds or the rush of lemmings to the sea ... It is a force wholly impalpable ... yet, knowledge of it is necessary to right judgments on passing events.

Yet, so many investors seem to be hyper-focused on the news of the day and the effect that will have on the market. In fact, today, we have television channels dedicated to analyzing the financial news of the day wherein they attempt to constantly explain how the news supposedly impacts the movement in the market. I am not sure I could find a bigger waste of time.

Some of my members posted these headlines from this past week. If you read them carefully, you will see just how comical it is to follow these news outlets.

And to think that so many market participants eagerly tune in to these news outlets, read these headlines, and are not able to put two and two together. They simply do not see how ridiculous this has become. But, it makes it clear that there are very few who actually think on their own.

In fact, most “analysts” or financial writers still suggest that “the fate of markets is inextricably intertwined with the ebb and flow of geopolitics... it's become increasingly clear that one simply cannot fully comprehend market movements without a thorough understanding of concurrent political outcomes.”

Unfortunately, these are the same authors who have been on the wrong side of the market for many years. Their track record would suggest that a “thorough understanding of concurrent political outcomes” is a detriment to identifying market direction. In fact, one such author was bearish the market all of 2016, 2017 and 2018, and when the market pulled back 2% in 2018, he became ready to “buy the dip.” This is likely a textbook example of why following “the ebb and flow of geopolitics” is the exact wrong thing to do.

As so many of my long-time members have noted, following market sentiment based upon price action has freed them from the bonds of wasting time with financial television programs and most of what is written about the market. In fact, not only do they comment to me that they spend less time evaluating their positions, they are much more profitable in doing so, and sleep more confidently at night about their positioning.

How is that possible?

Well, recent studies have shown that the market is a self-contained environment, where exogenous events are not as impactful as so many seem to believe. And, if more people would recognize the truth, the television programs and stations would soon go out of business.

In a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for what drives the herding phenomena within financial markets:

Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.

In fact, as Ralph Nelson Elliott stated eighty years ago:

The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.

So, you may want to reconsider how you view the market. For if you are following the financial or political news flow, whether it be televised or in print, how do you expect to outperform the market?

In other words, don’t be a lemming. Think for yourself.

HOUSEKEEPING MATTER

If you would like notifications as to when my new articles are published, please hit the button at the top of the page to "Follow" me.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.