Market Top?

‘Davidson” submits:

Market prices despite the many predictions by professionals have never followed a cohesive logic connected to fundamentals. Prices of everything bought/sold are set by market activity driven by market psychology of what things are worth. Markets fluctuate dependent on market psychology of the moment fed by media headlines. Human activity is market activity and includes product, service and information exchange. When you look deeper, products and services are items derived from information and innovation repurposed into business offerings on which individuals derive profit. Most stop their analysis at evaluating what stocks and bonds are worth, but what something is worth is at all times a moving target of information exchange. If the idea improves standards of living better than other ideas, it sells better and produces profit for the innovator. In the marketplace innovators offer ideas but it is consumers who make the judgement on utility. While businesses are believed to set prices, prices are in fact set by consumer willingness to purchase. This is an individual value judgement of one offering vs other offerings. What people believe things are worth differs frequently from fundamental measures. This is the crux of Momentum vs Value Investing. Momentum investors believe prices reflect intrinsic value but Value investors see prices as only what investors are willing to pay for fundamentals.

Markets always reflect a wide gap between prices and fundamentals with areas mispriced based on the themes of the moment. Today two themes are playing out, the ‘stay-at-home’ vs the ‘back-to-work’ as investors cope with the economic impact of COVID. Media headlines can be pessimistic one hour and optimist the next in an ebb and flow too fast to fathom with common sense. Advisors promoting their expertise (and seeking new clients) provide so many short-term streams of direction it is a muddle based on enigma.

How one makes sense of it all is to ‘connect the dots’, i.e. all the dots possible to find the fundamental drivers of market pricing. The ‘dots’ comprise a wealth of inputs but when one works through it, simple relationships become apparent. Over the short-term these patterns do not jump out of you but longer-term they are far more obvious. Net/net it is fundamentals over the long-term that drives market psychology despite the presence of an unpredictable quicksand of short-lasting themes. Short-term market themes provide head-fakes throughout every market cycle. This creates confusion for any investor with a short-term trading mindset. Short-term themes are very much like being in a house of mirrors. Bitcoin is one of these.

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Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or ...

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