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Sunday, March 3, 2013

Disconnects Can Release Energy Into An Unprepared System

Yes and no votes for the Are US stocks ready to crash poll increase as stocks fall and rise, respectively.  This voting tendency explains why sentiment is bullish at tops and bearish at bottom.  Human behavior always favors standing with the crowd and the vast majority of investors are slaughtered without mercy in the great financial panics.

Since 35% have voted either Don't Know or message of the market says..., it suggests many are trying to learn how to stand alone.

Those trying might consider the following:

  1. Reality rarely equals perception.  That's why unexpected things happen in markets.
  2. Where does reality stand?  The growing cash position in the commercial banking system reflects a 'disconnect' between reality and perception (chart 1).
  3. Disconnects, like tectonic plates shifting unexpectedly, can release a tremendous amount of energy into system.  That system can be a city, market, economy, or one's portfolio of investments (chart 2).

Chart 1: Cash As % of Total Bank Credit (Cash%TBC) and S&P 500

Chart 2:  Cash As % of Total Bank Credit (Cash%TBC) and S&P 500



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