Wednesday, September 26, 2007

Visualizing Market Fear

How can you cope with market fear? Many investors consider this a crucial question. Yet it often isn't until periods of fear and sharp market downturns that investors think, "now I know I shouldn't sell everything, but it really hurts!" It's at these times that the excellent investors and traders stand out. They can muster the courage to buy in such markets, even as the financial news and media pundits are screaming, "The sky is falling!"

The MarketPsych Fear Index was displayed on the Wall Street Journal's C1 Money and Investing page a couple weeks ago (Tuesday, September 11, 2007) See article here. See left for the unsmoothed Index used in the article.

The MarketPsych Fear Index helps investors visualize the fear they are feeling that is affecting their judgment. Studies show that we're all affected by market fear, and it takes a lot of courage and experience to step back and see the fear and identify the opportunities that it creates. The first step is understanding that fear is contagious. The second step is identifying where it is and how strong it is. That's what our Index allows.

Now for a brief bit of self-congratulation. During his three CNBC appearances in August, Dr. Murtha rightly re-assured long-term investors that August was a good time to hold stocks, think long term, and consider buying where opportunities could be found. One of my blog posts called the bottom of the sell-off and predicted the rally to come.

Given the intensity of the recent fear, we're on track to continue a bullish Autumn for US equities. Malaysia (MAY) also looking good with deep discount to earnings (PE of 2) and declining dollar protection.

Interesting action (potentially near-term topping) in China. Tremendous profits made in Chinese shares so far the last couple years. Average PE is around 60 now (notwithstanding some accounting shenanigans, such as not counting state-owned shares towards market caps). More on China in another post.


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