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There Is A Psychological Time Delay In Markets

After information is made available to all, there is time until it is assimilated. Every piece of information can be interpreted differently by different people. However, sometimes there is information which is easy to understand, not controversial in its implications, but still takes time to assimilate. This is noticeable with the Fed rate hikes. The market is late to assimilate this information. It takes weeks, if not months. While there are technical moving parts that contribute, the strongest source of this delay seems to be crowd psychology. People understand the information, but until the market price changes, they are hesitant to act. Valeant Pharmaceuticals was a glaring catastrophe at $260 a share, but the market price alone prevented people from even questioning it. Many people expect market reaction to be immediate, and if it is not, they conclude that the market disagrees. This is not the case. When reaction does appear, it is hard to stop since everyone jumps on board. This results in the market overreacting.

It was easy to see that oil prices would drop again soon in early November due to a high rise in US storage stocks. However, since the price did not fall yet, people did not interpret this obvious information, and assumed prices may still rise, or at least stay put. Of course, after a few weeks when the price did dip down again, it did so convincingly. People take the reality they see right now in price levels, and cannot shake the impression. Imagining a different future than the present, is a very hard thing to do.

There is little hope for a conforming mind to make money from financial markets. On the flip side, financial markets are a godsend to contrarians.