Most stock market investors are aware of the “Stock Market Sentiment Cycle.” It is usually displayed as a picture of the “market” going up, peaking and going down, and then bottoming out and going higher again. There are supposedly 14 stages of emotions through the price trip.
The first stage is “Optimism,” which is like the roller-coaster starting to move forward and you are fairly positive that stock prices are going up. This is followed by “Excitement” and anticipation as the carnival ride starts to slowly go up the elevated track.
Excitement leads to “Thrill” as prices are high enough that we are beginning to firmly believe that everything will work out favorably just as we expected. Then soon the stock price hits a fabulous high and we are in “Euphoria” knowing that everything we touch turns into gold.
But suddenly—just like on the roller-coaster ride—things get a little confusing. What was fun a moment ago turns to “Anxiety” as the coaster —and the stock price—starts going down. But we know that the “downtrend” will not last for long.
At the top of the roller-coaster, the view was fantastic but now we can see an unending stretch of track in front of us that looks like it might end in a fiery crash on the ground. But our “Denial” assures us that the downtrend is only temporary. Unfortunately, though, only the roller- coaster is designed with a “temporary downtrend.” Further, your investment in a ticket for a carnival ride comes with a promise that you will return safe to where you started. Your investment in the stock market does not come with that guarantee.
“Fear” starts to kick in and you become confused as you get a glimmer of realization that you might not have been as smart as you thought. But selling out with a tiny profit or loss is out of the question, as that would confirm that you are not a “stock market expert.”
With profits wiped out and loses threatening, “Desperation” comes and you know it is time to “do something” like averaging the price down. “Panic” seems a reasonable response now that you own more shares and have higher losses.
At the “Capitulation” stage you are psychologically broken, babbling almost incoherently and selling at whatever price you can get, not even thinking about “the money.” “Just get me off this ride.”
The “Despondency” stage is like waking up with a throbbing hangover and then finding out you not only lost your wallet, but somehow your car has huge dent in the door. Prayers are sent to heaven with promises never to do that again. We next spend time in “Depression.”
Soon, though, we start looking at the stock market again—as prices start inching higher—and think with “Hope” that we can do this again and do it right. We buy a little as prices are increasingly higher and then with “Relief” see that the stock market is not dead after all. We regain our faith in our ability to invest. The cycle starts all over again.
Let me share my dark secret only with you: I hate roller-coasters. Scuba diving in a cave, parasailing in the middle of the ocean and diving off a cliff are all good. But I despise being completely out of control on a roller-coaster.
The “Market Sentiment Cycle” is unavoidable, inflexible and eternal. But the moment you start to feel the negative emotions—the worst being “Euphoria”—sell everything and run away as fast as you can.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.