Midweek Market Update

Market updateDear PGM Capital Blog readers,

In this midweek’s blog edition, we want to highlight some of the most important events for the week of September 22 and September 26, 2014.

  • Greed and Fear
  • Must see internet links
  • Technical market outlook

Greed and Fear

This week we will discuss a controversial subject. The subject is Greed and Fear and this is more about market psychology then fundamental or technical market indications.

Technical analysis acknowledge the concept of Greed and Fear as market driving force by stating:

Buyers and sellers move markets based on expectations and emotions (fear and greed).

Greed and Fear is difficult to measure by itself, there are a tools like the Greed and Fear index or the VIX index, but these are just calculated numbers by algorithms which mostly give you a glimpse into the past, but will hardly give you any trustworthy indication of where we are or where we are heading.

To get a more accurate read of where we are on the Greed and Fear scale, we have to look more into the market psychology, emotions and behavioral economics.

Cycle of Market Emotions

Cycle of Market Emotions

The Cycle of Market Emotions is a simple representation of how emotions do move the markets and that emotions in the market are acting like a cycle and market emotions will let markets react to extremes and that’s why we see bubbles and crashes happening.

Benjamin Graham described market emotions in his book “The Intelligent Investor” very well by comparing the market to a real person by calling it Mr. Market:

Mr. Market is often identified as having human behavioral manic-depressive characteristics, it:

  1. Is emotional, euphoric, moody
  2. Is often irrational
  3. Offers that transactions are strictly at your option
  4. Is there to serve you, not to guide you.
  5. Is in the short run a voting machine, in the long run a weighing machine.
  6. Will offer you a chance to buy low, and sell high.
  7. Is ‘frequently efficient…but not always.

This behavior of Mr. Market allows the investor to wait until Mr.Market is in a ‘pessimistic mood’ and offers low sale price. The investor has the option to buy at that low price. Therefore patience is such an important virtue when dealing with Mr. Market.

When the book of Benjamin Graham was released in 1949, times were different, we didn’t had 24 hours TV broadcasting, social-media and highly efficient and super-fast communication networks. Basically these new media and communication technologies will just amplify the emotions in the markets to even bigger extremes. But the media can also give us a great indicator to where we might be in the Cycle of Market Emotions.

This comedy clip by The Daily Show portraying the Alibaba IPO last week, gives glimpse into the mentality that is right now happening in the stock markets. There is a lot of euphoria and very little critical questions asked if this stock market rally is sustainable in the long term. Here another video to give an idea what is going on in the market these days:

On the other side, when we see a red day between all these green days, it sounds like a small panic in the media, while some healthy pullbacks in the market are nothing unusual, especially after such a strong run in the equities. Here is two videos to show you the unrealistic views that are in the markets (please remind yourself that the markets are at near all time highs):

There are much more examples of this and the general sentiment on the equity market is very bullish with no end in sight. While we of PGM Capital have been looking at the fundamental data for a long time and advising to be cautious and warning of potential bubbles that are created from all the cheap money printed by the central banks, we can observe this “bull market with no end in sight” mentality on Wall Street.

While this analysis is mostly subjective and based from personal market observation, there are a lot of opinions on this subject. What we can conclude is that:

  • On bullish days we see a lot of euphoria and high amount of greed “bull-market with no end in sight”
  • On bearish days we see a lot of nervous voices, mixed with comments “this is an opportunity to buy cheap”

We don’t know when we might see a bigger stock market correction, but it is clear that emotions are running very high and this is always been an explosive combination in the past when it comes to bursting bubbles.

Lets not forget one fundamental fact, around the world central banks are still in “crisis” mode for more then 5 years and are very slowly trying to turn around, while equity markets are at all time high.

Must see internet links

Please take your time to read/watch the following links that we have posted below.

Technical market outlook

This week we will look at the equity markets and give short-, mid- and long term sentiment indicators. To represent the equity markets we will use the S&P 500, the FTSE, DAX and the Hang Seng.

Short Term – Multi-day trends (7 up to 60 days)

  • S&P 500: Bearish
  • FTSE 100: Bearish
  • DAX: Neutral / Bearish (Near a bearish crossover point)
  • Hang Seng: Bearish

Mid Term – Multi-week trends (4 weeks up to 6 months)

  • S&P 500: Bullish / Neutral (Near a neutral crossover point)
  • FTSE 100: Neutral / Bearish (Near a bearish crossover point)
  • DAX: Neutral / Bearish (Near a bearish crossover point)
  • Hang Seng: Neutral / Bearish (Near a bearish crossover point)

Long Term – Multi-month trends (3 months up to 5-6 years)

  • S&P 500: Bullish
  • FTSE 100: Bullish / Neutral (Near a  neutral crossover point)
  • DAX: Bullish
  • Hang Seng: Bullish

While a short term bear market is nothing to worry about, but if a short-term bear market continues without any major recovery, it might trigger mid- and long-term bearish sentiment which can lead to broader sell offs in the market.

As a comparison the long term bull-market sentiment for the S&P 500 has been in place since December 2009 without any interruption. A bearish crossover in the long-term sentiment will trigger some major sell orders which can lead to a prolonged equity bear-market.

We will keep you updated on the technical market aspects.

Last but not least, before following any investing advice, be aware that above outlook is of pure technical nature and does not respect any global macro events that will disturb this outlook. Please always consider your investment horizon and risk tolerance and financial situation.

Yours sincerely,

Michael Panneflek

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