Identifying the Sparks that Contribute to Market Movements
By Anthony Rhodes
For all its complexities and supposed mystique, a careful examination of the stock market reveals that it is essentially a measurement of human emotion. Throughout its history, the gut-wrenching ebbs and bountiful flows which has contributed to fortunes being either lost or made, can all be attributed to our direct responses to either fear or excitement, with subsets of these primary sensations thrown in at various intervals.
The understanding of this perspective opens up a range of possibilities, including forays into ways of predicting its eventual movements. If human beings are emotional creatures, and the market, a gauge of emotional responses to stimuli, should not our recognition of such stimuli provide us with an advantage as to deciding not only what, but also when to invest?
The key to answering this question lies in the observers' ability to identify the catalysts which prompt these aforementioned emotional responses. When one obtains the ability to do this successfully, he or she will no longer be subject to the nuanced or idiosyncratic methods defined by the tools employed by market speculators, but will be able to abandon these techniques with absolute impunity. Because upon reaching such a point, they will have arrived at the level of complete understanding of what actually directs the markets' movements.
Fear Factors
The fight or flight action is nature's response to our encounters with fear. When presented with these two options, we decide (based on the data available to us at the time), to either mount a defense, or retreat; both being under the auspices of self preservation. This process is universal, and extends equally to our monetary fears. When an event takes place which is likely to invoke a state of fright, investors respond in predictable ways. Those in the fight camp generally do so by purchasing precious metals, or by analyzing the situation and purchasing those sectors which are likely to benefit from the fear that the occurrence will induce. The flight camp's constituents simply respond by selling their assets. But each of these actions are a direct interpretation of this founding rule.
"I'm So Excited, and I Just Can't Hide It"
Our responses to excitement are also predictable. Excitement causes increases in perspiration and heart rate, and floods our system with dopamine; all actions being symptomatic of our anticipation of receiving a reward of some kind. It's no surprise, therefore, that a chart representing the stock market after its receiving of exciting news, looks surprisingly similar to that of an EKG of a human being upon doing the same. This universal response transcends our differentiated worlds, and makes its outcomes equally as transparent. When investors receive positive news regarding stock that he or she owns, this catalyst induces a similar response; as they know that there's a general likelihood that their stock's price will increase, ultimately rewarding their bottom line as a result.
Having emotions is an essential component of being human. And since the stock markets' movements are based on emotional responses, its resulting charts are no more than a physical representation of our actual feelings laid bare.
What's missing in this equation is the median; that all-important component which lies in between fear and excitement. I am, of course, speaking of the disciplined emotional response of aplomb. Because of all the fortunes made by those investors impulsively navigating between fear and excitement, the markets' most successful winners are the individuals who applied this emotion, and simply maintained their positions through it all.
(Anthony Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com. Do not reproduce without permission)
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