Nature of the Market…Fooling 99.9% of the People

Well the stock market is pushing all time highs and the Dow Jones Industrial Average (DJIA) closed the week on its high for the week and at a new all-time closing high.

The DJIA closed above 22,000 for the first time ever this week.  People were wearing Dow 22,000 hats and there were big headlines on the evening news…DOW 22,000

There is much bullishness right now and I’m sure people are starting to wonder if we are not in some grand new environment.  A big bull market that doesn’t end for many more years.  After all President Trump is all about making America great again, right? 

Nature of the Market

The nature of the market is to reflect human nature. And human nature doesn’t change. Now many folks like to talk these days about the machines trading in the stock market. And by machines I mean super powerful, extremely fast computers run by programs called algorithms.

Google’s online dictionary defines algorithms as ” a process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer.” Many folks refer to the machines by the nickname “algos”. 

My view is that the machines still had to be programmed and that programming was done by humans. Which brings us back to human nature. And when it comes to human nature, it is basically the emotions of fear and greed that play out as the nature of the market. 

Going Against the Crowd

You’ve probably heard the saying the “trend is your friend”. So trying to ride the trend is trying to take the path of least resistance…going with the flow. Where this becomes dangerous, is when the trend becomes crowded.

Analysts talk about a “crowded trade”, meaning too many people have started to believe that it is a sure thing.  And when the psychological pendulum swings too far one way, usually it is about to reverse.  So analysts look at psychological indicators.

I do that on a regular basis. Looking for sentiment extremes and patterns that might repeat. But I also look at price structure in the market. The waves of the market.  And right now the wave structure of the market is painting a very clear picture.

Fooling 99.9% of the People

The challenge with the stock market is that things never repeat exactly.  Markets go to extremes. And the market time-frame never seems to be what you expect.

The title of this post came from an interview that Bill Griffeth of FNN (now CNBC) did with Paul Tudor Jones on Monday October 19, 1987 during the 1987 Crash.  

In this interview, he says, “The market is doing what it always does and that’s fooling 99.9% of the people and that’s why it’s happening now.” Watch the video below.

 

 

That was Black Monday, the day the DJIA lost 22% in one day.    Now in the video, Mr. Jones felt that this was the start of a major bear market. He had been using the 1920s price action in the DJIA as a proxy for what might happen.

Even he was surprised at how the market played out that October.  And the market did eventually bottom later that year and rally into 1988 but it never turned back down.  So again the market has a tendency to do the unexpected.

30 Years

This year is the 30 year anniversary of that crash.  In 1987 the market peaked on August 25th.  And here we are now closing at new all-time highs in August 2017.  Do I think that the market is going to crash because it’s the anniversary of the 1987 Crash? No. 

I don’t know if the market will crash. No one does. I do believe we are getting very close to the end of this bull market. And I have a unique perspective on that wave structure that I share with my members.

I do believe that the strength and severity of the new bear market will surprise the vast majority of people.  After all that is the nature of the market.

Spread the Word!
Powered by WishList Member - Membership Software