Morning Outlook
10/16/03 08:27 AM ET
"Our instinctive emotions are those that we have inherited from a much more dangerous world, and contain, therefore, a larger portion of fear than they should."
-- Bertrand Russell
There are market observers who contend that there is a single human emotion that ultimately determines the course of the market. That emotion is fear. We either fear that we will lose money or we fear that we will not make enough. Some folks consider greed to be a fundamental emotion that also drives the market. Greed is really just another form of fear. It is the fear, rightfully or wrongfully, of not having enough.
Throughout the three-year bear market, fear of losing money was the predominant emotion. Rallies were sold quickly because investors feared they wouldn't last. After a huge six-month rally investors' predominate fear has shifted to the fear of not making enough money. Many were cautious for far too long, and now that their friends and neighbors are starting to talk about making money in the market again, their fears of being left behind are driving them.
The fear of being left out manifests itself by driving investors to chase momentum and/or buy minor pullbacks. It is the reason that the market continues to look extended and has had only minor corrections. Investors are clamoring to buy stocks to ease their concerns about not participating -- the fear of losing money is a minor concern.
Even when the market was slightly negative like yesterday, we continue to have a huge number of new highs, especially in the smaller-cap stocks. This is because of the large contingent of folks who fear that they have squandered their chances of making money and are now anxious to make up for it.
Don't underestimate the fear of not making enough money. It manifests itself differently than the fear of losing money, but it's a very potent force that does not evaporate quickly. It is the key driving force now, and it's the reason you can't feel confident that the market will suddenly go straight down. There is a big pool of investors who are kicking themselves for underperforming and will jump on opportunities to buy.
Yesterday we had a taste of the old-fashioned fear of losing money -- or perhaps it should be characterized as prudent profit-taking. Despite good news and solid earnings reports, we sold off on an increase in volume. The most troublesome thing about the action was that breadth was poor. The pullback was fairly minor, but the failure of good news to rally the market should keep us on guard for further excuses to take profits in an extended market. |
