Crowd behaviour and its impact on our thinking

Friday's price action shows that the balance between supply and demand remains very much in balance. Since the last high of the DOW there was a week of near stability before a big sell off began on the 25 July. We are now eleven days (two weeks approx.) into that sell off. 31st July was the day of the big move when there was a 300+ point slide.  The four days around the big fall added up to a 600+ point fall. The low was hit on Thursday last week at 16334, 800 points below the high. The fall over the period on the S&P was comparable though the pattern looks different. 

We can no longer rely on coordinated movements in the major markets but on this occasion the Nasdaq mirrored the other US markets and the FTSE fell by a comparable amount. The Nikkei seems to have taken its cue from the US market to began its fall on the 31st July but has only puled back by just over 3%. The DAX, on the other hand, began its slide earlier at the beginning of July and fell by over 12.5%. 

The China market, in contrast, kept going till the 5th August after a spectacular near 13% rise from the 18th July. From then it slipped 4% to its low before recovering on Friday, in anticipation of the US markets. The chart below shows that it is in a very different place. It is a long, long way from its all time high which was way back in 2007. The market is trading 70% below the level achieved in those heady days. Even returning to the nearest local high of February 2013 prices have to rise by 30%.

 

Friday saw a recovery in the US markets. Too early to say that we are back in positive territory - the futures markets following the close were indicating a pull back. So we just have to wait and hope, if we are in the market.

My UK portfolio took a big hit on the 1st August but that was mostly down to GVC, which dominates that portfolio. There has been a pullback o my other shares too but they are still holding their own: 5 winners 4 losers, with 1st July being the beginning of the buying campaign. 

My China shares are also looking OK.

Crowd behaviour and its impact on our thinking

Treacy analyses the impact of crowd behaviour on our thinking in some detail. The key point is that as a market trajectory intensifies: i.e. the herd's move develops into a gallop there is a strong temptation to dispense with rational thought and to get swept along by the mood of those around us. 

Notions like "earnings don't matter" gain currency so that stocks with dismal fundamentals become part of

the cohort of strong "buys." Market commentators have to shout louder to be heard. Only the most outrageous forecasts, in the direction of the trend, attract attention so that we are subject to more and more extreme predictions about how far this bull market will run. 

Conversely equally shocking forecasts of Armageddon and the disintegration of the financial world as we know it become the norm as a market succumbs to the impact of a credit crisis or any other story that can begin a downward price spiral. And it captures the mind of fearful investors.

Bottom line we, as investors, are sucked into a prevailing fashion and no rational consideration can sway our thinking as we are swept along by the rush of the herd. Only the smartest, and the richest are fully able to take the risk of anticipating the bottom of the market.  Only they can afford  to take advantage of the bargains that are available as an irrational market slashed the prices of good and bad stacks alike. It is easier to take profits and stand to one side as the herd runs towards the cliff in the bull market. But even this has its dangers. Fund managers who pulled out of the dot com bubble early were pilloried for missing the last days of profit opportunity.