Monday, February 25, 2013

Investor psychology shows signs of complacency

An increase in news headline optimism has been noticeable in the last week or two which, from a contrarian’s perspective, give some pause for concern.  While the market is very far from outright exuberance, there’s more than enough optimism to suggest that a short-term top is possibly near.

The feature headline in this morning’s Yahoo Finance web site was one from Reuters: “Wall Street rallies on growth optimism.”  Historically whenever words like “optimism” appear in a headline it’s a “heads up” indication that investor complacency has risen to levels that could produce at least a temporary trend reversal.

The lead sentence in the aforementioned Reuters article stated that “investors grew more confident that the global economy would continue to grow.”  That’s another cue that investors’ expectations have reached the complacency stage.  Complacency doesn’t usually produce long-term tops – it takes extreme enthusiasm on the part of investors to do that – but it does signal that the short-term trend has become vulnerable to a correction. 

The Reuters article also quoted a direction of an economic think tank, who said, “The major trend is that indexes will keep moving higher.”  When economists use their favorite tool, linear extrapolation, to make stock market forecasts the outcome is often less than satisfactory.  

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