Archive for August 12th, 2012

Fooled by DOW

Behavioral error called representativeness suggests that humans can be easily anchored. These anchors are psychological biases, which are more inaccurate than accurate. If you buy a used car based on just the odometer reading and the model year, you are anchored (biased not objective).

Stock markets are no different and market players work on similar anchors. Now what are the most watched popular anchors? Gold or dollar may be important anchors but nothing beats the allure of the Dow. What happens in America (especially American markets) still gets the most eyeballs. Why America? Why Dow? Call it soft power, spin or Mac burger @ IPhone. The more we get globally interconnected, the more we get emotionally hooked, and the more we get anchored (hooked onto a bias), the more global markets get correlated.

Despite limited emerging market history, it has not taken us much time to sync regional market lows and highs with Dow. Be it 2000 high, Sep 2011 lows, 2007 highs and the recent 2009 lows, the equity brotherhood oscillates together with the Dow. So if the Dow is so important than watching it closely for cues remains essential.

One may say, Ok! Dow is an anchor, but why the fooling? There is one thing about the market I have learnt over years. It always surprises. The element of surprise is repetitive.  The cyclical nature of the market exists because the majority of market participants are intuitive. So if there are only 95% of us bearish, the possibility of a bullish reversal is more likely. Surprise is also because when majority clusters at the intuitive bearish end, it leaves the market no choice but to surprise. 95% bears have limited counter party to keep falling. In other words bears need a buyer to sell too.

You can read the complete article in Business Standard

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.