Rev Shark:
Don't Shortchange the Power of Emotions
12/13/04 8:31 AM ET
"The best and safest thing is to keep a balance in your life, acknowledge the great powers around us and in us. If you can do that, and live that way, you are really a wise man."
-- Euripides
It becomes increasingly difficult to maintain a balanced view of a market that has made major moves since mid-August and are levitating just off their highs. The bears become more convinced that we are on the eve of destruction while the bulls become increasingly comfortable that nothing bad can happen and are even more inclined than usual to ignore even reasonable concerns.
In an environment like this, our job, more than ever, is to maintain balanced thinking and strive to understand both the bullish and bearish cases. Cold hard objectivity is never easy but it is even tougher when we are both financially and emotionally invested in one particular viewpoint.
Doug Kass over on Street Insight has done a good job setting out the bearish arguments. A mediocre economic recovery, struggling consumers, poor retail sales, interest rate pressures, overconfident market participants, the weak dollar, high valuations and so on are all reasons to be worried, according to Doug. As is generally the case, the bears sound pretty darn reasonable and logical.
The bullish case is much more difficult to appreciate, especially because it is premised more on the emotions of investors, rather than on fundamental arguments. Jim Cramer does a good job of discussing the emotionalism that helps support the market now. There are underinvested bulls, money managers hungry for performance points against their benchmarks, and positive seasonality supporting the market. One of the easiest things to overlook is the great power of momentum. Newton's law that objects in motion tend to stay in motion applies to the market as well as the physical world.
When we compare and contrast the arguments of the two sides, the thing that sticks out the most is that the bearish arguments are not conducive to accurate timing while the bullish case is much more short-term-orientated. We certainly can find things to worry about if we like, but it is extremely difficult to accurately guess when the broader market may start to worry about these things as well.
We need to balance our legitimate worries about fundamentals against the realities of the current market momentum. Neither should be underestimated, which means we have to stay particularly attuned to signs that the mood of the market may be changing.
As we start the week the bulls are feeling confident once again. The saga of Peoplesoft (PSFT:Nasdaq) and Oracle (ORCL:Nasdaq) is coming to an end, Nextel (NXTL:Nasdaq) is likely to be acquired, crude oil remains soft, the dollar is slipping a little and overseas markets are mostly higher. The big economic news this week is the FOMC interest rate decision on Tuesday at 2:15 p.m. EST. A rate hike is expected but as always the decision will stir up some emotions.
Gary B. Smith: