This is how to understand markets
For many, understanding the way markets work is daunting. They like to tell us we should just leave all of that stuff to the slide rule crowd and be done with it. But “it” isn’t really all that hard to understand, in fact, it’s pretty easy.
Rallies happen when buyers get aggressive and demand stock from holders. The holders are like, "Hey, I've decided to hold onto my shares, go away." Then buyers have to offer more to persuade the sellers.
That's how rallies get going. It's not just some news event; no one really gives a flip about the integrity of the eurozone. Rallies are just moments in time when the global collective unconscious gets a whiff of confidence and buyers start to feel aggressive. Yet, at the same time buyers get more aggressive, holders become more withdrawn and start to hide. They start to get confident too and want to keep to themselves -- hold onto their shares and never let go. That conflicts with buyers' emotions, so something has to give. And that thing is price. It gets pulled upward by confidence.
Of course, very often the market is plagued with overconfidence, and sometimes that happens for a long time -- months and months, or even years. That's a bubble. But that is not a problem we are seeing now.
Right now, the market has been stuck in a range as potential buyers have been moping around, fearful of all kinds of random and inconsequential matters like Greek sovereign debt (really?!) and the multiyear forecasts of a pack of old, academic snoots at the Federal Reserve who could probably not even predict which direction the sun will rise from tomorrow.
But pretty soon the balance between mildly fearful buyers and mildly overconfident holders is going to give way, and there will be the equivalent of a dam break. One side in the epic tug-of-war seen this year is going to lay down their opinion and join the other side. And, when that happens, there will either be a roar higher that will take your breath away…or a cataclysmic drop that makes you wish that you had followed your Aunt Polly's advice to never invest in stocks because she had a great-aunt who lost everything in 1929 and ended her days renting kids shoes in a bowling alley.
-- Jon D. Markman
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