The Stock Market Is Not a Rational Beast

The market keeps chugging along to the great consternation of many folks who don’t understand that the stock market is not a rational beast. As the economist John Maynard Keynes supposed, ‘Markets can remain irrational longer than you can remain solvent.’

The market is a mob of investors, and mobs just think or feel like individuals. When the mob is in control of the action, it almost always becomes excessive. As I’ve written many times, momentum almost always lasts longer than seems reasonable.

There are always market professionals who think they are smarter than the market, but they often have great difficulty navigating the action because they don’t understand that it isn’t about logic or intelligence. It is all about emotions and feelings.

The single most important dynamic moving this market right now is the fear of being left out and underperforming. There is an irrational belief that the market will never allow them to buy if they don’t chase at this point. That will eventually prove incorrect, but it is what is keeping this action going. There is no way to know how long that will persist.

If you are trying to figure out when the market might turn, the most important thing you can do is focus on the price action rather than logic or fundamental arguments. When the price action turns, it will cause FOMO to erode, and when FOMO erodes, then there will be the potential for a reversal.

Don’t even think about a market top until there is an intraday reversal and a weak close. That will be a sign that emotions are shifting.

Saying that investors who are buying now are stupid and greedy might make the bears feel better, but it illustrates a lack of understanding of market dynamics.