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Point & Go Figure: Market Psychology, SPX, DJIA



Mini-Minyan Mailbag:


This is what I don't understand about psychology in the market. If the market was going down and people were as bearish as they are bullish now, we would probably have a big bounce like we have had over the last few weeks. But, now that we have rallied and everybody is bullish that I can see, the market looks like it won't go down!

We haven't really even had a decent pullback yet. It seems to me the psychology of the market is only working in one direction. And if this is the case, we could go on a long time like this. Does this make sense at all to you?

Minyan DG


That is the beauty of the long-term bullish percent indicators. They look bad (meaning they portray risk as high) when everything looks great, and good (meaning they portray risk as low) when everything looks awful. We may continue to rally, but at some point, if the demand is sufficient, those indicators will reverse up and force me to become less bearish, perhaps even bullish depending on the field position. I am not concerned with the SPX or NDX going to new yearly highs, or whatever, or if this particular breakout means X or Y or Z.

Instead, what I am concerned with is the risk of being short or long, at a given point in time; in other words, the context. If I let my dispassionate indicators guide me in terms of what the risk in the market is, the rest will take care of itself over time.

Not all 7% moves in the market are created equal, though many traders and investors mistake them for being the same. A 7% move from these levels entails far different risk than a 7% move under lower risk conditions. I may be wrong about where the market moves from here, but I am satisfied that my evaluation of the risk level is correct. I cannot control whether my analysis is right or wrong; the market will do what it wants to do. But I can control my response to it.

Ultimately, it is not about being right or wrong. Everyone will be right and wrong at one time or another. That is life on Wall Street. It is about having a discipline that protects you if you are wrong, and which forces you to make the difficult decision to change your posture when the conditions change, regardless of what your emotions, which are almost always wrong, are telling you to do.

Major Market Overview:

S&P 500 (SPX) 10x3 basis

Dow Jones Industrial Average

Charts courtesy Dorsey, Wright and Associates.

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No positions in stocks mentioned.

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