 |
Economic indicators are useful in giving us some clues on the future direction of the overall economy that will in turn affect a company’s performance.
However, apart from economic indicators, the stock market performance is also affected by business conditions and investors’ confidence.
As such, it is important for us to pay attention to certain psychological indicators that give us an insight into how the general crowd in the market react to any given condition.
Local investors may not be entirely familiar with psychological indicators. Nevertheless, although no official indicators are published here, there is nothing stopping us from establishing our own indicators. It is not rocket science. What is needed is simply careful observation and analysis.
Some of the psychological signals listed below may not be quantitative but would be sufficient to give us some good leads in helping us make prudent investment decisions.
Investors’ reaction to market trends
Lola L. Lopes (1987) in his research titled “Between Hope and Fear: The Psychology of Risk” pointed out that the two main emotions that drive investors’ mood are hope and fear. When the stock market is taking an upward trend, we can observe the people around us buying stocks. Everyone seems to be buying, even the fish monger in the wet market!
The crowd consequently gets bigger and the market becomes hotter with irrational optimism. This sends out a signal to us that the market is at its peak. Hence, this would be the best time to get out of the market.
On the other hand, when the market experiences a downward trend, the smallest of bad news will trigger panic selling from the crowd. It is when the market is overwhelmed by pessimism that we can find opportunities. Our pot of gold is waiting to be discovered, and what is needed of us is careful analysis and cherry picking.
From the cash availability standpoint, during extreme bullishness, what we stand to find is that most cash in the market has already been invested. As such, the demand for stocks becomes lower, which in turn weakens the forces pushing the stock price, leading to a turning point. During periods of extreme bearishness, everyone views the stock market pessimistically and this is where plenty of money in the market can be seen waiting to be invested. However, as the situation improves, investors’ confidence slowly returns, resulting in greater potential for stock prices to be pushed higher.
Spread of rumours
Whenever there is a rumour, especially unfavourable ones regarding a certain company, you will notice its stock price dropping drastically. If what the company talked about has sound fundamentals and we know that the market is over-reacting, then this is the time for us to think about picking up the stock.
When the actual news is eventually announced by the company, the market usually comes to terms with the fact that the impact of such rumours is not as bad as they had initially thought.
This is when the price will rebound. If you do not intend to hold the stock for the long term, then it will be wise to sell. As Benjamin Graham used to say, “The market is always making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks.”
Major shareholders' transactions
There are times when you can observe large volume transactions taking place, and those carrying out such transactions are the company’s executives or major shareholders. When this happens, it signals to us that something may be happening in the company that we, as outsiders, know nothing about. As the company’s top executives and major shareholders are the ones making strategic decisions and having access to insider information, any unusual actions from them warrants our attention. We have to look into the details of the company if we hold its stocks or are interested in the company as an investment. Announcements on these changes can be found on Bursa Malaysia’s website.
Popularity of companies
The best time to buy a stock is when others fail to take note of the stock’s potential to turn into a gold mine. Once the stock has attracted the attention of institutional buyers, it may be a bit too late for us to jump in, as by then the price will have already gone up. When you start seeing a company’s name or its CEO appearing in the news, talking about the success of its company, the stock price has probably gone up and there is typically insufficient demand from the remaining retailers to push the price up further, later. If you spot a potential gold mine, rush in before others do!
Stay alert, stay ahead!
The important message here is that we must be able to recognise the signals that investors in the market send out before taking any action. Most of the time, it will be wise to keep our cool and act against the crowd. Going against the popular move is not something strange as far as good investing habits are concerned.
As Benjamin Graham aptly put it: “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it — even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right”.
Securities Industry Development Corporation (SIDC), the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.
No comments:
Post a Comment