Suppose you were watching the TV news last week and learned:
- Personal income jumped 1.9% last month
- Disposable income was up 5.7%, the sharpest gain in 33 years
- In the last 20 years, the average lifespan has increased by 3 full years
- As a nation we have never been healthier
- Real pre-tax income per worker hit an all-time record and was up 11% since the current president took office
- Americans net worth is $15.3 trillion more than it was seven years ago
- Since 2000 nonfarm business productivity has expanded 21%
- 9.2 million jobs have been created since 2001
- 80% of poor households have air conditioning and 97% own color TV sets
Those facts certainly would paint a pretty rosy picture, certainly nothing like the economy we have really been hearing about on the news. No wonder the markets have made it to official bear territory and no wonder the indexes saw one of the very worst June's. What a different world it would be if those were the facts. While this setting may be a far cry from today's reality, it would be interesting to see how those factors might influence market direction.
Oh wait, according to two articles on the front page of Investors Business Daily on Monday, June 30, 2008, respectively entitled "Do Foreboding Headlines Reflect Real Trends or Media Mind-Set?" by Terry Jones and "Rebates Fuel Spending, But Consumer Outlook Tough" by Scott Stoddard, those are the true facts. The list above represents selected facts that help describe current conditions, but though quite positive, are having little apparent effect on market conditions and movement.
The answer, at least in part, is people's perception as opposed to actuality. In listening to the news on network TV and in reading various publications, the perception seems to be that the sky is falling. Clearly, oil prices are heading out of sight and many of the financial institutions are in trouble as a result of their relationship to the sub-prime mortgage crisis, and many people may lose homes for the same reasons. As far as most of the network news I watch goes, that's the whole story. The perception is that things are in terrible shape.
As is often the case, the markets at least in the shorter term react or overreact with emotion to perceptions. Here, I would suggest, the perception is that the economy is in the tank, almost doomed; the outlook is bleak. The reality, I would suggest, is not quite so bad as the perception. Just look at the positive facts listed above, and things seem a little more balanced at least. I don't mean that high oil prices are good for our economy nor do I think that the sub-prime crisis shouldn't have a significant affect, I only mean to say that on the whole things are better than they are portrayed day to day. If the perception (whether right or wrong) is that things are bad then market action is not only likely to be bearish, it is likely to be more bearish than the facts actually warrant.
All this is to say that if we can gauge the perception of traders, their current psychological bent, we are more likely to be able to give ourselves an edge in our trading. In general, and in the short to mid-term, it is the psychological, not necessarily the logical, that moves markets. The psychological reactions in the market are, in many cases, driven by perception rather than reality.
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!
Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft
To comment on Bill's article click on the "comments" link below.