Markets Behavior

I am musing about the market behavior. Truly, it is the market that continues to confound and frustrate traders both long and short alike. If it were as easy as doing good due dilligence, finding good technical set up, and assessing market trend, everyone would be billionaires by now. One point to remember in Wall Street is that it is highly manipulated. In many instances, markets act in direct inverse correlation to mass psychology. It has been repeated over and over throughout the history of Wall Street. The insiders and the investment banking institutions always win while the smaller retail investors are usually left holding the bag. How can this be? Don't we have an efficient market system in place? Well, not really. It is because of this inefficient market theory in the short term, many traders lose their shirts. With the advent of the internet, financial media, and easier access to stocks in the form of lowered commissions and better access to information, volatility has increased but also manipulative issues also have increased. If you doubt me, just read Cramer's confessional on his recent Thestreet.com video where he goes too far and exposes how the hedge funds aim to milk and destroy the general investment community by creating a false facade of what is actually happening. Everyone knows it and everyone including the SEC just shrug their shoulders at this issue. This is not at all a bad thing in a sense that if you realize that this is happening and accept this as truth, then it is much easier to trade on the side of "strength", "setups", and "propaganda".

The one thing that is the dagger in most trader's quest for profit is the "emotions". Psychology can be a dangerous thing. Perception is even more deadly. I can't quote this but some research while back have shown that patients with frontal lobotomies usually do better in the stock markets. This may have some truth behind it. This is because it diminishes the "impulse" nature or "herd mentality" of human beings. Additionally, being able to separate noise from true facts is very difficult for even the seasoned traders. If anyone has reached trader's Nirvana, it would be probably in an evnironment of mental institutions.

Then it came down to me self examining myself. Is my perception of reality in this market the truth? No. I have failed too many times to be able to state that. Am I being stupid by following my due dilligence and going against what the market is telling me? Perhaps I will lose but I have made more money than I can count when I hunkered down and had faith in myself. That brings into question of self esteem. How much do I believe in what I have gathered to be the truth from the market research? Do the "big boys" know more than me with their access to information or do they have a better grasp of what is being "conjured" as the truth so that the retail investors continue to prop up and do their bidding? These are all philosophical questions that always comes up when the markets confound and frustrate me.

But eventually, the equilibrium must be reached as eventually, the truth will be found. Eventually that truth is in the form of share prices of the stocks that are being focused on. I think the battle that is being waged today on whether our economy is sound versus frail in and of itself is a confounding one. In my opinion, and it is just that, the writing is clear as day that the economy is not healthy. That we should be more prudent in cash right now and see how this plays out. But the market has waged a good come back last week. It is ignoring all the negatives that are getting louder and louder. In concert with the global economy, the markets continue to go up despite the growing concerns in Iraq, Iran, US mortgage bubble/real estate bubble (notice how I separated that?) more on that later. But the issues behind how the major institutions continue to beckon the retail investors to go long baffles me. Is this run sustainable or is the sharp precipitous drop not too far ahead? I don't know. What I do know is that the investment community is again complacent. People are now overly bullish and the sentiment is rising on the bullish side once again. The negativity or the wall of worry is completely ignored. Seemingly that appears to be the case. But there is another issue when you dig deep inside this market's behavior.

We have reached another possible inflection point in the market since 3/14/07 follow through day on the Nasdaq. But investors must remain cautious here and look for further signs of upside. This market is propped up on hope. The hope of a rate cut in May (Cramer), The hope of subprime problem being isolated, the hope of prime Alt-A loan not being an issue, the hope that the housing market has bottomed and the consequences of the housing bubble will somehow magically go away, the hope that our government's quagmire in Iraq and the Middle East will magically go away, the hope that some bubble economies in the emerging markets will not be true. All of these are hope and the market seemingly is going on with the hope. But in the realm of the Wall Street, hope is a fading dream, a facade, and "hope" is a dangerous thing. It clouds the judgment and blinds the investor's eyes with rose colored glasses. I am not sure if any of these "hopes" are real or immaterial to our markets. Perhaps our economy is efficient and is able to absorb these major shocks and will continue to rise. But to me, ultimately, all things invented by humans are ultimately imperfect and we are asking for perfection in this environment.

I do know one thing. The celebratory bullish sentiment pervades this market once again. There are numerous noises that the market doesn't want to hear and they are ignored and even considered non existent. This head in the sand approach to the markets also remains a core problem on why I think we are headed for a precipitous fall in the near future. That is because our market system is flawed and we have not been able to take away from the psychology and deep rooted primitive emotions of human beings. We always at the core are optimists. That is what keeps us alive and strive for a better life. Ultimately, if the market meltdown does come to a pass, we will rememeber this event as a hiccup and within a few years, the investment community will trudge on forward, and completely ignore the next warning. But for now, the bullish sentiment prevails and I wonder if another shoe to drop is lurking not too far behind to prove this current mass psychology to be false, and have the retail investors heading for the hills with the tail between their legs while the investment banking community laughs all the way to the Bank.

Black Rock IPO looms large, and to me this is the confirmation that the end is probably nearer than anyone gives it credit for. In the mean time, I will uncomfortably squirm and watch in disgust as the mortgage debacle takes form, and Mr. Mozilo's artful dodging of the problems inherent within the real estate market continues to have me in awe. Mr. Mozilo is indeed a man to be reckoned with. Because he has the entire investment community wrapped on his fingers and propping up the markets while he continues to sell his majority stakes on the open market while pumping up the shares of his company, Countrywide. I believe in Countrywide- Countrywide loss of dreams, poverty, and broken dreams. Aptly named. So Mr. Mozilo, please continue to sell, but remember when it is all said and done, your wealth came at the destruction of the American dream and ultimatley your share holder dreams.