Friday, August 27, 2010

Believing Is Seeing

Have you ever heard another person describing an event which you attended? Did they describe it the way you remembered it? Probably not. Why the difference? When two people focus on different aspects of the same event, it is like they are seeing two separate events. If I am frustrated by my inability to connect with an old friend, and at the same time you were having the time of your life dancing, we will both remember the event differently because of what we were focused on at the time.

Or, perhaps we both witnessed the same thing, but our perceptions of what we just saw were different. You may have thought the guy was, perhaps, distinguished. I, on the other hand, may have thought he was way too big on himself.

This is what happened to the markets, on Wednesday. American new home starts were near a record low, and oil inventories were higher than expected. Did the markets go lower? Yes, at the start, but then they quickly rebounded. Buyers came to the rescue seeing their opportunity to buy things on sale, rather than selling their losers.

Events do not drive the markets - perceptions do. Sure, events can generate a reaction in the markets, but the market trend is set by the overall perception of market participants. Perception is determined by sentiment. When we believe it we see it. If I am feeling like the luckiest person on the planet, it is because I have numerous references to back it up. I choose the references, and I choose what they mean. In any given day the media sees the markets are up, so they look for the good news that caused it. They wouldn't even begin to look for the bad news that explains what just happened! Likewise for bad days.

As goes the optimism or the pessimism of the herd, so goes the markets.

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