Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Investor Expectations Also Need Tapering As We Enter 2014

Stock-Markets / Stock Markets 2014 Dec 28, 2013 - 01:02 PM GMT

By: Sy_Harding


Psychologists say much of the reason investors have such a dismal record of buying high and selling low, of being excited and buying enthusiastically at market tops and then bailing out in disgust at market bottoms, can be explained by the ‘recency bias’ of the human brain.

That is we expect whatever happened most recently to continue, even though facts tell us it is unlikely. When a severe hurricane strikes in an area where such catastrophes are rare, even though experts describe it as a once in a hundred year event, we strengthen our preparedness on expectation of more such storms the next year. When those health warnings we had a month ago recede we forget about seeing a doctor since more recent experience is not alarming. When the stock market has been going up for several years, that recency has us forget the longer-term memory of severe declines.

Warren Buffett explained recency bias in investing in his warning in 1999 that the market was near a serious top saying, “Investors project out into the future what they have most recently been seeing. That is their unshakable habit, looking in the rear-view mirror instead of through the windshield.”

In 1999, they were looking back at the powerful bull market of the late 1990’s and projecting it to continue endlessly into the future. Instead, the severe 2000-2002 bear market took place, which those like Buffett who were looking through the windshield saw coming. After the bear market ended, it was still the scene in the rear view mirror for quite some time. And with fear having replaced greed, investors then extended its trend endlessly into the future even though the 2002-2007 bull market was underway.

Currently, seeing the wonderfully one-directional market of 2013 in the rear view mirror, and the five-year bull market beyond that, investors are obviously extending those trends in a straight line into the future.

Investor sentiment as measured by the Investors Intelligence poll of newsletter writers is at 59.6% bullish and 14.3% bearish. That spread between bulls and bears is an extreme ratio often seen near serious market tops.

This week’s poll of its members by the American Association of Individual Investors (AAII) shows investors are 55.1% bullish, only 18.5% bearish, and have 64% of their portfolios in stocks, just below the 69% stock allocation reached near the 2007 market peak.

The respected Ned Davis Research Crowd Sentiment Poll, a proprietary composite of numerous sentiment surveys, recently broke out above 70. That rivals some of its extreme readings of the past, and has Ned Davis Research Inc. expecting a 20% market decline sometime in the next 12 months.

Investors need to keep recency bias in mind as we enter 2014, since what is showing up through the windshield may be at odds now with the scene in the rear view mirror.

For instance, for the past five years the Federal Reserve has continuously increased its monetary QE stimulus. Beginning next month it will reverse the process to continuously decrease its stimulus.

For five years Washington has increased its fiscal stimulus, running the national debt into record territory in order to provide more spending, more support for the unemployed, more incentives for businesses to expand.

Washington is now also reversing that process. An estimated 1.3 million Americans will lose unemployment benefits Saturday when that emergency relief program expires. At the same time, the accelerated depreciation program that has allowed businesses to depreciate 50% to 100% of the cost of equipment purchases in the year of purchase rather than over 20 years, will expire.

Meanwhile, the additional market spike of the last year has stocks much closer to, if not already at, over-valuation levels. The average lifespan of the 11 bull markets since 1950 was 53 months. The current bull market is now 57 months old.

None of these observations, differing markedly through the windshield from what is seen in the rear view mirror, constitute sell signals. Nor can they predict when a market might top out.

But they do indicate the changed risk as we enter 2014, and how the ‘recency bias’ that has investors so enthralled now may become a problem.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2013 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Sy Harding Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules