In the world of trading and investing you always hear about how the markets are constantly changing, and to some degree that’s true. However there is a certain fundamental truth about trading and investing that doesn’t change: the predictability of human behavior.
When traders talk about changing markets they’re generally referring to the overall direction of the market, or perhaps to the changing levels of volatility. Markets go through bull phases when investors feel optimistic about the prospects for the economy and earnings. And sometimes they buy stocks, simply because they are the perceived best investment vehicle at that particular time. After most investors become fully invested in the market the topping phase begins. This is when buyers become increasingly emotional about missing the boat and begin recklessly buying without regard to price. Unfortunately, these latest buyers will be the first to sell, since prices will fall from the lack of new buyers, and these cycles will repeat again and again.
On the flip side, a decline by any of the major averages (S&P 500, Dow or Nasdaq) of more the 20% from peak to trough is deemed a Bear market by most on Wall Street. This is when investor’s moods have soured and they have lost their enthusiasm for buying…. Continue Reading
