Markets rise on a wall of worry and fall down a cliff of Joy

May 14, 2010 3:26 PM ETDOG, SSG, FAZ
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Long/Short Equity, Deep Value, Special Situations, Contrarian

Contributor Since 2009

Sol Palha is the head financial analyst at Tactical Investor. He is a self-taught Student of the Markets, having widely read conventional and non-conventional texts on all aspects of technical analysis, Mass Psychology and philosophy
Emotions are the main driving force behind the markets, not technical analysis or fundamentals. Those that focus on one or both of those elements are missing a huge part of the picture. Once the emotion that’s driving the markets is identified one can determine the trend and then fundamentals and technical analyse can be used to refine one’s analysis further.
When combined Mass Psychology and technical analysis are second to none and can accurately help one determine market topping and bottoming action in advance of the event. One should not confuse topping and bottoming action, with trying to predict the actual top or bottom. An endeavour best left to fools with plenty of time on their hands and an inordinate capacity to deal with pain and failure.


 

Companies are reporting higher profits, supposedly more people are getting jobs and as a result those that stopped looking for jobs are now more optimistic about landing a new job, Consumer sentiment is improving, retail sales rising, unemployment insurance claims are down and the list goes on.
So why is the market falling; perhaps the market has already priced in all this, and it needs something more to power it. Perhaps it also senses that all this so called good news is just a short term development and that the potential for extremely bad news is rather high.
Bottom line; tread carefully as this market is extremely overextended. The action of the past few days clearly illustrates that our one of our favourite sayings at the tactical Investor could actually come true.  Mass psychology dictates that the best time to buy is when there is blood in the streets and the best time to sell is when everyone is celebrating; its time to take a stand or risk falling down the lemmings.

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