Investor Psychology is Evolving

It is very interesting to trace the cycles of emotions.  You can sit there and speculate all you want about investor emotions, but when it comes down to the nitty gritty, there is only one way at Hays Advisory and that is our Psychology Composite.

All of our investing heroes have cited the importance of "buying straw hats in December," which of course means buying stocks when the herds of economists, strategists, and media journalists are the most negative.  But we've found that our analysis of psychology is also swayed by our own emotional responses.  So, we let our totally quantitative composite guide our interpretation.  And today, this composite remains in its stance of P2 (1 = most bullish, 6 = least bullish).

Two weeks ago, our Psychology Composite moved up to P3 from the P1 reading it measured in the low following the panic decline.  That was a normal kind of action, but at the same time, we pointed out that short-term indicators had become overbought, and at the same time, the indices had moved to a resistance zone.  Also, in the last two weeks, we've had a succession of 200 point days in each direction; however, that has produced nothing but lower highs and higher lows - biding its time. 

The situation has improved slightly, but as we expressed a few weeks back, our "druthers" would be for the NASDAQ's 21-Day Oscillator to drop at least under the -50 line as shown in the chart below.  And today, it has a way to go.

Click on the image above to view a larger chart.

In these kinds of market junctures, there are always some opposing "flies in the ointment" to give us pause, but the bottom line is, and history tells us, to remain true to our discipline.

Don Hays

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