Market psychology and trading tactics

by | May 30, 2003 | Archives

A friend who specializes in market psychology and trading tactics outlines his feelings about the equity market now. Do not miss the important ideas he shares here.

"Hi Gary, I'm 100% long right now because the market is going up and it could go up 100% from here over the next 12 months, but I doubt it. In my opinion, we're in a secular bear market. These things occur every 20-25 years (regularly since 1802) and they can last as long as 18 years. They typically don't end until we get PERs around 5-10 in blue chip stocks and dividend yields of around 5%+. The bear market will be over when everyone says 'I'll never invest in stocks again' and most mutual funds will be out of business. "If we have an inflationary market, the stock market might actually go up a little, but the real value in the stock market will decline. However, we're on schedule for a deflationary bear market and that would take the SP500 down 75% from where it is now. And these bear markets love to have nice corrections in the middle, like now, to suck everyone back into it. The worst part of the 1930's bear market was not in 1929, but after it corrected and got most people back in again. That's now. "This, of course, is only my opinion, but it's based on history and my feeling of group psychology. Major bear markets do not end when everyone has this type of psychology. They end when everyone says,'I'll never invest in the stock market again' or better yet, 'You'd have to pay me to invest in the stock market' which means great yields on undervalued blue chips. "Take a look a Michael Alexander's book, Stock Cycles, for a great explanation. It was published in 2000 and mostly written in 1999. You can get it from Amazon. "History also shows you cannot predict what the market will do in a 12 month span, but you can in a 5-10 year span. And my prediction for the latter is down. Of course, I'll always pay attention to what is happening now which tells me to be long. However, I'll be out very rapidly when this thing turns again."

These comments match my sentiments exactly. You can read other messages on this subject at:

Until next message, good investing!