Article Category: Psychology

Economic Momentum and Virtuous Cycles

When most people hear the term momentum, they think about classical physics - the idea that an object in motion stays in motion, unless otherwise disturbed. Those who spend their lives watching prices tick are familiar with another type of momentum - price momentum.

This refers to the empirically observed tendency for rising prices to keep rising, and falling prices to keep falling. Price momentum is a very powerful driver of asset prices, with its roots in behavioral psychology. But today I want to talk about a different type of momentum - economic momentum.

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Posted in: Earnings Economy Momentum Psychology

Let the Charts do the Talking

What separates technical analysts from the rest of the investment community? If you had to boil it down to one particular trait, it would be the belief that markets discount everything. That is, a stock's (and therefore an average's) price already reflects everything that has or could affect a particular company.

This includes broad macroeconomic factors, as well as company-specific considerations such as expected demand for a particular product. And of course, market psychology plays a big role in this as well. Because all of these factors are believed to be "wrapped up" into the share price, there is little need to consider these factors separately when making an investment decision.

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Posted in: Dollar Dow Theory Interest Rates Market Breadth Psychology

Viewing the Market Through the Right Lens

Daniel Kahneman , Professor Emeritus at Princeton, is an American psychologist who is well known for his work on the psychology of decision-making and behavioral economics. Together with Amos Tversky, he established a cognitive basis for common errors in judgment that occur as a result of various heuristics and biases.

Kahneman is most well-known for his work on prospect theory, for which he received the Nobel Prize in Economic Sciences in 2002. He also wrote Thinking, Fast and Slow, in 2011 which quickly went on to become a best seller. If you haven't read his book I'd highly recommend it, for the following reason:

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Posted in: Dollar Earnings Federal Reserve Interest Rates Psychology

Inside the Mind of a Crowd

John Maynard Keynes once wrote what may be one of the most insightful observations on financial markets ever conceived:

We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees.

Now, what exactly is he talking about?

While it sounds like Keynes may have been practicing some rare form of martial arts, or Zen meditation, he was actually talking about financial markets ... in particular, how to predict them.

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Posted in: Earnings Economy Federal Reserve Psychology

Short-Term Expectations vs. Long-Term Realities

Equity prices around the world have been hitting new highs recently, as the global bull market continues to push higher. But considering that stock prices track economic fundamentals over the long-run, and global economic growth remains modest at best, how much higher are prices likely to go?

Those who have had the benefit of studying markets for some time know that asset prices tend to be volatile in the short-term, as they are driven primarily by investor psychology. But take a step back, and it becomes evident that over the long run asset prices are heavily constrained by economic growth ... if the whole pie doesn't grow larger, then companies are really just fighting each other for market share.

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Posted in: Economy Inflation Interest Rates Psychology Volatility

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