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Why It Could Take Several Legs Down To Achieve A Real Bottom

18 August 2009 No Comment

Market psychology is an interesting subject.  When thinking about the market pyschology today and of the past year or so, I have a few observations:

  1. Despite a definite effect that the down market had on people over the last year, it’s amazing how easily people have bounced back into believing that we’re heading higher now and for a prolonged period in the future.
  2. Perhaps, since the market went UP for so long prior to the current recession (you could argue a 20+ year bull market), maybe we have become so conditioned to bull markets that we have a hard time believing that the “good times” won’t resume once we “fix this recession”.

I have to wonder if in order to really change the psychology of investors, it requires both time and multiple legs down.  When it comes to time, it might take several years of down markets to really “demoralize” investors.  When it comes to corrections or “legs down”, maybe it takes several of them to really convince investors of the ugliness that is the stock market.

When comparing tops and bottoms, I like to compare the general attitude of investors.  At the top, everyone says “you gotta own stocks” and they say that referring to both the short term and the long term.  If a bottom should have the opposite attitude, shouldn’t a bottom mean people are refusing to buy stocks and think they should be avoided at all costs?  I don’t think we ever achieved this attitude in this current recession.

With that said, maybe the government is able to merely inflate the markets by printing money so that we never have to achieve a real bottom.  If this is true, then the only way to get a real economic bottom will be when either the government has to fight inflation more than a recession or people (China) stop lending us money to finance our “stimulus efforts”.

Isn’t investing fun!

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