One day it’s up, the next day it’s down. That’s what the stock market has been like lately. Reminds you of someone who is a bit manic-depressive.
And that’s an apt analogy because the market does have a personality and is heavily driven by psychology right now. Fundamentally, the market is depressed. It has been since its collapse in 2008-2009.
Anti-depressant pills in the forms of government borrowing — but more importantly, government money printing — have helped keep the market from going over the edge and melting down.
But, they don’t solve the underlying causes of the depression. They just keep the patient stabilized.
So, the patient is highly vulnerable to mood swings.
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Some days, the market feels like all its problems have been solved. A new solution to the European debt crisis, a great kick-off to the holiday sales season, and other positive data all give the patient reasons to think that all is good.
But, of course, the reality is that it is not.
The patient gets overly happy with a little bit of good news, but then a bit of bad news hits and the patient gets depressed again. Up and down, up and down with a tendency to get increasingly depressed over time. That’s what we are seeing now.
Of course, if the Fed starts printing money, that will act as an anti-depressant for the market. However, it will only work for so long before the patient gets depressed again since the fundamental problems with the U.S. economy and the world economy are still there.
Borrowing money and printing money isn’t solving our problems and our problems aren’t being automatically solved on their own.
For now, most investors are happy to ride out the market’s mood swings although they are uncomfortable. That’s because the anti-depressants have worked to keep the patient from getting too depressed. So, investors have learned that if you just ignore the swings, you won’t get hurt that bad.
But, what happens if at some point in the future, the anti-depressants don’t work very well.
Investors hope by that time the economy and stock market will have automatically recovered. But, what happens if they haven’t, which is likely since neither markets nor economies are guaranteed to be self–correcting.
That’s when market psychology gets much more interesting. Everyone has been trained by recent experience to expect that the market can be easily medicated at little cost. A groupthink has developed and been reinforced.
That groupthink has made the market much more vulnerable to a major collapse. If in the future the patient isn’t responding well to the medication of printed money, the shock to groupthink will be huge. Everyone will change their tune at the same time and feel that the risk of being in the market far outweighs the potential upside to the market.
The problem is that everyone can’t exit the market at the same time. So, investors who thought they could ease out of the market and limit any damage from another big downturn will find that they are caught in a big whirlpool sucking them down quickly with everyone else.
The final “medication” for the market, may be to close it down temporarily to prevent too many investors from heading for the exits at the same time.
The stock market collapse will be blamed on high frequency traders and hence shutting down the markets temporarily will stabilize the damage from such trading (which is over 50 percent of daily trading volume). But, in the end, that won’t save the market and will simply make it even harder for an investor to make an orderly exit out of the market at the right time.
It’s the same situation for any market that is being manipulated. Markets that are being manipulated to hold them up don’t have a gradual decline.
Instead, psychology can change very harshly and very suddenly catching many by surprise. The more the Fed works to print money to hold up the market through non-market forces, it makes the market ever more vulnerable to a sudden collapse.
It’s just one more reason that it is increasingly hard to time this market. It’s also the reason it is becoming increasingly dangerous to try.
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.
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