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NFTRH82 Excerpt: Market Psychology

Given that the broad global rally off of unsustainable negative sentiment has ground on much longer than many (my hand is raised) originally thought, it is logical to assume that this condition may be challenging many peoples' resolve. We track 'dumb/smart money' sentiment nearly every week in NFTRH, and the reason is that despite technicals and fundamentals, the market will only change course in a significant way when the psychological profile is allows for it. More and more, it looks like extremes will need to be registered, perhaps with the intensity of Q4, 2008 to Q1, 2009 only in the opposite direction. They are on their way.

NFTRH82 highlighted gold sector technicals and fundamentals in relation to those of the broad market, charted up other markets, indicators and stocks, and reviewed the updated dumb/smart sentiment picture. But in the middle of all this, the following bit of psychological navel gazing found its way in there as well, perhaps as a way to work through the fact that the market has not yet conformed to conclusions that the writer 'thinks' he knows are solid ones. :-)

Here is a secret; none of us has the divine right to the answers. To ultimately win at this sometimes manic game, we must employ a wide spectrum of technical and fundamental tools, but also be aware of sentiment and psychology both from a collective standpoint and a very personal one as well. In other words, know our competitors and even more importantly, know ourselves.

Market Psychology

At the risk of exposing myself as the psychologist wannabe that I am (there are multiple mental health professionals in the subscriber base), let's think about the general [psychological] profile currently in play. Many of us are micromanaging the massive rally off of the bottom of just over a year ago. Some, like NFTRH are micromanaging a would-be top. Others are going with the bullish flow, secure in the reinforcement of ever increasing positive sentiment. Still others are sitting sidelines, having been out since compelling downside sentiment forced them out in preservation of their sanity. I would venture that the market is wearing on a high percentage of people's nerves.

As a currently bearish newsletter writer, I have to tell you about something that makes me uneasy regarding my stance, short term. As part of the bus tours around Manhattan my family, friends and I enjoyed last week, we were taken through the Wall Street area among many other places - the memorials at the church at Ground Zero brought me tears and a rush of returning memories - we went through Wall Street twice. Each time, different tour guides made cracks about the crooks there and all the money that people lost. My thought was 'dude... where have you been for the last year?' with regard to the rally. Maybe when the tour companies drop that shtick the rally will be ready to roll over.

Anyway, a micromanaged rally is not likely to end on cue. That is one reason NFTRH81 noted that rallies don't usually end on any given alarming news item. Dubai? Greece? Goldman/Merrill? It is all good until one day, after more cementing of perceptions, it no longer is. But the rally will not end logically and in a nice neat manner in which bears can simply climb aboard and short to the high heavens. Watching them scurry to cover on Friday afternoons is almost becoming comical, and the market is feeding on that.

This is why it is imperative to double check our own individual psychological profiles so that we thoroughly know who we are as market participants before deploying capital. This beast does not care about you or me. All of that said, I am personally attempting to employ the opposite strategy from that which I used late 2008 and early 2009; I am trying to remain cautious as opposed to brave. After last year's gains, I have been in 'preserve capital' mode for what seems like an eternity, while holding a precious metals core-plus.

The market wants me to feel like it is an eternity because it wants me to become impatient and make a mistake. The market wants me to take my eye off the ball either through fatigue or greed or some other screw up. Ah, but I have a secret weapon; I get to sit down and write about the current market situation each weekend and work through my thoughts after the dust settles on a given trading week.

Nothing has changed for me or for NFTRH with the exception that the stance contrary to hope and greed has not yet come to fruition like the one contrary the angst and fear of a year ago did. I've got time. Not only that, but things are going better for me personally now than they were a year ago and that helps me remain focused, as opposed to dealing with vulnerabilities, which can manifest as additional mental noise.

I will remain strong in my convictions but only so far as the work that I do tells me to be so. We will not institutionalize negativity, bearishness or fear of the future here at NFTRH. What we will do is make an ongoing honest attempt to be on the right side of the macro trade, and if proved wrong, admit it and move on with a new course.

So, another important aspect of good personal market psychology is the ability to admit when we are wrong. It happens to the best of 'em and it will happen to each and every one us; every last subscriber and the letter writer for sure. As of now however, I see no sign whatsoever that a cautious stance is wrong in any picture beyond the immediate manic bullishness.

If you would like to check out a service that focuses on technical analysis, macro-fundamentals and of course sentiment/psychology, give Notes From the Rabbit Hole a try on monthly basis. Not for you? You can cancel at any time. NFTRH remains on course to catch the larger themes in play in the macro markets, while respecting the shorter term swings driven by mass psychology, among other things. -- http://www.biiwii.blogspot.com


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