"It is indeed beautiful to see a person put out to sea with the fair wind of hope; one may utilize the chance to let oneself be towed along; but one ought never have it on board one's craft, least of all as pilot, for it is an untrustworthy ship-master." ~ Soren Kierkegaard
Are you hopeful or even optimistic about near-future economic and market conditions; or do you see a return to near-past despondency and depression?
As a whole, the feelings of investors are described as something called investor sentiment. In fact, some investors, especially contrarians, use investor sentiment as a gauge for forming investment strategy; to do the opposite of the herd. For example, when investor sentiment is extremely euphoric, a contrarian may consider selling stocks; and when investor sentiment reaches panic, a contrarian may consider buying stocks.
Contrarian strategy considers investor sentiment cycles, which would suggest that the point of maximum financial risk is when the investor herd is irrationally positive; and the point of maximum financial opportunity is when the herd is irrationally negative:
It's not difficult to see that the last Bull market, which peaked in October of 2007, was followed by the investor sentiment (emotions) of Anxiety, Denial, Fear, Desperation, Panic, Capitulation, Despondency and Depression. This took us to 2009, which began with Hope.
Consider some words from my post beginning that year, 2009:
Hope is not a plan; Hope is not a prudent foundation for success; Hope can not be quantified or measured; and Hope does not translate into any form of currency or something that can be exchanged for a tangible good.
Above all, Hope is not rational; but therein lies its power.
Specifically with regard to market sentiment measures of the collective investor herd, greed and euphoria, which mark the top and opposite end of the market cycle from where we are today, are not rational either; however, similar to Hope, their equal and opposite powers to move financial markets are real and should never be dismissed.
Which Way from Here?
The Hope of early 2009 was followed a few months later by Relief that extended and even touched on some Optimism into early 2010.
Now that monetary policy and fiscal stimulus appear to be running out of steam, it seems we have stepped backward in sentiment: Optimism and Relief appear to be dissipating, which brings us back to Hope.
As noted previously in this post, Hope is not a prudent plan but it is equally powerful as it is unquantifiable and unpredictable; therefore we stand again at a point of great uncertainty.
The market sentiment cycle does not progress forward in a predictable pattern, as the image above might suggest. Sentiment, just like stock prices, does have a long-term forward progression but can take steps backward in the short-term.
We could now, in the short-term, just as easily go back to Depression and Despondency as return forward to Relief and Optimism.
Where do you think the market sentiment cycle stands today? Where will it be in three months? In one year? Where do you stand personally?