Bear Market Psychology

Bear MarketOn September 16th 2011 the Expectations Indicator (included in the “The Art of Expectations”) signaled a Bear market. When me move from a Bull to a Bear market not only does the direction of the market change but also so does its psychology.

The obvious change in the psyche of the market is one of an optimistic nature to a negative one. Interestingly though, it is the process of transitioning from this positive attitude to a negative one that defines a Bear market. Once we are completely committed to the negative outlook, this is when we begin to transition to a Bull market.

Some signs of Bear market psychology are seen with the reaction to anticipated news. For example, when we have good news in the market it never quite lives up to its expectations (even though it may have beaten consensus expectations) and the market reacts adversely. On other side of the coin, when we have overly negative expectations on anticipated news and it disappoints, as expected, the market reacts positively.

Another sign of a Bear market attitude can be seen with the reaction before the anticipated news is released. When a market-changing event is approaching and expectations are high, a Bear market will buy the anticipation and sell the news. The opposite holds true, when a market-changing event with overly negative expectations is approach, a Bear market will sell the anticipation and buy the news.

These seemingly contrary reactions are actually the beginning transition from a positive mindset to a negative one. The process is unfortunately grudgingly slow and painful. It is especially hard to let go of a good thing.

So what conclusions could we draw from these characteristics of Bear Market Psychology?

1. If a piece of news or event is approaching and we are in a Bear Market (expectations are high), we should buy the anticipation and sell the news.
2. If a piece of news or event is approaching and we are in a Bull Market (expectations are low), we should sell the anticipation and buy the news.

So how do we know when a Bear Market is over and transitioning to a Bull? If we take this logic to heart, then it would have to be when we believe all is lost.

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