Market Emotions - Where are we Now?

There have been quite a few anecdotal instances of individual investors ready to sell out entire stock portfolios out of panic. In many cases, these portfolios may contain companies selling at good prices, in some cases, outstanding values. There are a lot of companies in this market that are now good value. Yet, for every argument presented to suggest potentially that now may not be the best time to sell, panicked investors may offer an even more impassioned counter argument as to why stocks were still miles away from any type of major low. It is a funny thing, but markets in particular always work this way following a kind of perverse cycle that feeds on human emotions.

In the cycle of market emotions, ‘Denial’ gives way to ‘Fear’ and then eventually, “Panic”, “Capitulation”, and a “Depression.” In talking to many people, I hear a lot of those latter three emotions right now, and it is interesting because the market is not making new lows. Over the last four weeks, stocks have been in a trading range, yet the feeling I get from most people is more negative now than it was back in mid October.

Mind you, none of this means that the markets are necessarily near a final low, or that the downside risks in the economy will not persist and even get worse. Yet, within powerful trends, even Great Depression sized trends, there are periods of pause, periods of downside excess, and periods where psychology is given to mean revert. Accordingly, there is a chance that markets will base out and then recover. For now, it is all too soon to tell. For the time being, the best place for the average investor is to move the mental mindset back to the middle ground. It is time to, at least temporarily, step back from the ultra bearish camp, and time to give the markets a chance and see how things develop.