Sunday, August 28, 2011

Buy on Hewlett-Packard (HPQ) for Monday

HPQ heads-up:  Our media analysis is showing a recent uptick in bullish forecasts on HPQ stock (following on a series of very negative comments after several unpleasant surprises and a 20% stock drop following recent earnings conference call).  Such patterns generally lead to stock outperformance over the subsequent week.

See HPQ sentiment graphs here at marketpsychdata for more information.

Happy Investing!

Wednesday, August 24, 2011

Buying Bank of America During a Panic

We don't usually (ever?) publicize trading signals AFTER they were made good, but I found this one interesting:
>> 20110824,BAC,B,7940,6.3,50000,1,63846,1327214649.6,3,20110829,smb_t3_v1,S3.hvix.Reboundnr1.hi.Volfd3.hi.Selloffnd3.hi.PR2.lo

What that code represents is one of our quant sentiment-based trading signals telling us to buy BAC (Bank of America) and hold for a week.  The stock is currently up 9.76% today.

Yesterday we noticed our sentiment cluster showing GDX (Gold miners) as overbought and KBE (Banks) as oversold.   Both of these have mean reverted.  The current environment is excellent for mean-reversion based strategies.

In September we're launching a new newsletter in which we will be distributing our trading signals before the market open.

Happy Investing!

Monday, August 22, 2011

Holster that pistol - and load the Howitzer

The harder the conflict, the more glorious the triumph (quote by Thomas Paine)

After the roller coaster rides of the last couple of weeks in the markets, many of us in the financial advisory business walk in to the office with knots beginning to form in our stomachs - and out at the end of the day looking for the closest martini bar. Our routine consulting methods seem ill equipped to address (not to mention resolve) the angst we encounter in the faces and voices of our clients.

For our advisor readers, the MarketPsych Insights team assembled the following list of steps we think are a handy reminder of time tested methods that are usually helpful.

1. Start with EMPATHY by exercising true listening skills and gently probing for emotional (and perhaps thoughtful) reactions to market gyrations, we serve a valuable role as sounding boards to relieve client tension. The most important aspect of this step is to shut up and let the client talk. Think of yourself as a steam valve. Every time you ask a question, or state an opinion, you are preventing high pressure steam from being released. Let the client unload; you may get new and valuable insights into their fears.

2. Be prepared to help them EVALUATE PERSONAL IMPACT of any changes in their wealth levels. Not only is this helpful in moving the discussion into more deliberative (i.e., less emotional) territory, but it also helps to extend the investment time horizon beyond short term whacks into longer term plans. In all of my recent client meetings, we review their financial security analyses to clarify what (if any) implications result from short term losses in value. People are usually better off than they feel.

3. Remind them that huge market volatility always brings OPPORTUNITIES. The key idea is to provide an inventory of solutions (investment or otherwise) that will add value over their investment horizon; if they are prudent enough to make decisive action now. Making decisions in tough times also provides clients with a sense that they have at least some control over their destiny, which is always a good thing.

4. Discuss process and methods to institute DOWNSIDE PROTECTION. You might institute something a simple as an agreed set of automatic triggers for communication or portfolio actions. These may include only communications, or perhaps move to more complex venues such as put options, or other portfolio protection measures. You may also explore identifying shifts in asset mix to more undervalued yield oriented strategies as well as the consequences of doing so for longer term planning. Again these measures provide the client with a broader set of tools to manage their emotional fears and feel a greater degree of control.

It is in times like these that we either strengthen our relationships with clients, or find them eroding. Spending more time in dialogue with clients in tough times is not only good for them, but it is good for you (and your business).

Mark, the Advisor

Wednesday, August 10, 2011

MarketPsych Alert: Investors at Risk for Classic Investing Mistake

(First off- it you haven't read THIS , we invite you to do so. For one thing, it is so scarily accurate that you will not only want to subscribe to Dr. Peterson's Data Service, you will want to rent him out for parties. For another, it contains wisdom and stick-your-neck out prognostications for what to look for next.)


Would you rather have flowers in your garden or a bunch of gnarly weeds?
Obvious answer, right?

Not so when it comes to investing. And at "crisis points" like this one (markets down another today and fear is getting higher than Timothy Leary at a Grateful Dead concert ), it puts investors at risk for one of the biggest investing mistakes.

When the market is as scary as it is right now, there's always a temptation to sell. Perhaps to avoid further losses, or maybe just to have more cash available to go bottom fishing when the dust settles.

(MarketPsych Note: The above sentence has just been voted the single worst mixed metaphor in MarketPsych Blog history.)

Awkward phraseology notwithstanding, at times like this many investors will look to liquidate some stocks to free up cash.

The temptation will be to sell the stocks in which you have the biggest gains. Here's the problem.

The stocks that have performed well have done so, because they are BETTER stocks. There may be exceptions, but stocks that go up are by DEFINITION better stocks than those that don't.

Here's MarketPsych's internationlly famous "Wicked Gardener" Analogy.

Your portfolio is a garden. Good stocks are blooming flowers. Bad stocks are weeds.

Many investors free up cash at times like this by clipping those beautiful flowers and holding - or in some cases watering (i.e. buying more of) -- those weeds.

By doing so investors systematically clear out their quality holdings, ensuring that what remains in the portfolio are lower quality, worse run, worse performing companies.

Be aware of not only of this temptation, but also the underlying motivation. When looking at positions to sell, ask yourself this; are you chosing the stock because it is the one you should going forward? Or are you really selling a stock because it hurts less than realizing a loss on a position? And be 100% honest.

Because if it's the former - good for you. If it's the latter, well, we can relate, but protecting your feelings comes at the cost of protecting your money. It's a recipe for long term investing failure.

So I'll make a deal with you:

You do what's right with your money.

I'll work on my metaphors.

And hey... let's be careful out there.

-Dr. Frankenstocks

Frank Murtha, Ph.D.

Sunday, August 07, 2011

Downgrade! - The Psychological Terrain of What Comes Next in the Markets

Investors are in the same conundrum as the human brain.  The brain receives more than 1,000,000 sensory inputs every second.  But the brain's owners (us) can't consciously pay attention to each of those inputs.  During the latest crisis, investors are receiving tremendous amounts of information (mostly negative).  How can they possibly make sense of it all?  

Fortunately they can turn to the field of neurofinance for answers.

The brain's solution to information overload is to craft general feeling impressions and weave those impressions into stories - narratives - that serve as easily memorable summaries.  These narratives provide a concise explanation of what has happened and what to expect going forward.  

Over the past three months we've seen investors turn away from a narrative of recovery and towards the narrative of debt default and stagnation.  In the narrative of recovery, large deficits and debts are expected to be repaid through growth - as happened to the U.K.'s debts after WWII.  

But burdened by evidence of an economic slowdown, the recovery narrative for Europe and the U.S. collapsed over past three months, culminating in the downgrade of the U.S. AAA debt rating by S&P.  

As a result, investors are looking for a new narrative to guide their investing, and what they see is political paralysis (in the U.S.) and political impotence (in Europe) in dealing with the economic issues.

The new narrative being adopted by investors - whose readjusted expectations have contributed to the price shocks we've seen over the past two weeks - is focused on the unpayable debt overhang the developed world faces.  And the more it is recognized as unpayable, the more likely it will become unpayable through higher debt service costs - a self-fulfilling prophecy.  That feedback loop is the real danger of the current narrative.  Over the short term, this panic will play itself out, hopefully by mid-week, leading to a short-term (days) rebound which is likely to be prompted by a surprise announcement of QE3 or other government action after hours.  However, long-term we're still in the throes of a fundamental problem with developed world economies - political impotence and excess debt.


Anger is the by-product of the current narrative.  Anger and Fear are qualitatively different.  Fear is about the future and is often an overreaction.  After a spike in fear and a plunge in the market, there is usually a rebound and a return to business as usual.  Anger indicates a more fundamental reassessment of the investment environment.  And now we're facing investor (and social) anger.

Based on our linguistic analysis of financial social media, you've seen in the past few blog posts images of very high anger and disgust among investors.  Those emotions are feeding into expectations as well - it appears that investors' earnings expectations have been dropping for some time.  In particular, you can see that expectations of earnings for S&P 500 companies have been slowly declining since February 2011 and are at their lowest level of the past 12 months.  See the chart below:

For the short term, there may be a rebound by Tuesday or mid-week.  The way panics tend to play themselves out, we see a follow through sell-off through Monday, then a stabilization, and then "turn-around Tuesday."  So the odds are that we get a little bounce.  

But longer term, this selling will continue to play itself out.  There are really two alternatives to how we solve the huge U.S. debt overhang (increased taxes and lower spending are both required, but they still can't address the entire liability overhang).  We can inflate our way out of it (increased spending and QE3), or we can try to improve our balance sheet by cutting spending (fiscal austerity).  

Inflation is a stealth tax on everyone, while fiscal austerity is more obvious.  At this juncture, the U.S. is likely to fake fiscal austerity while going the path of inflation.  The U.K. is genuinely going with austerity (as is Ireland and Greece currently).  However, it remains to be seen how long citizens can tolerate slow economic growth due to austerity.  Eventually they are likely to succumb to the desire for short-term needs (jobs) - and vote in politicians who promise to increase spending despite the risks of inflation.  In any case, it promises to be an interesting decade.  

If you still doubt that market psychology matters, your doubt is likely to be tested again and again in the coming months.

There are still safe havens for investors - emerging markets such as Brazil, Chile, Peru, and Indonesia, and several African nations are emerging with credible investment environments.

Of course, in the midst of a crisis, we tend to turn away from what is unfamiliar (the familiarity bias) and pull our money closer to home.  In the case of the current crisis, that is likely to be a long-term mistake.

Happy Investing!
Richard L. Peterson, M.D.

Thursday, August 04, 2011


... Just winked.

I commented on this on last night's Nightly Business Report, but the debt crisis has revealed a fascinating an unforseen shortcoming of the Market.

But first some perspective. Do you think for a moment that if we decided to raise the debt ceiling quietly and without any fuss that the markets would have blinked? I mean, it's been raised 74 times since 1962. Ten times since 2001!

What? Is the 75th time the charm?

Of course not.

And it's not like our national debt snuck up on us. A few miles away from me at Union Square there's a gigantic COUNTER revealing the national debt up in real time.

So what's the big fuss? Why did people, who could have shouted "DOWNGRADE!" in a crowded market any time over the last few years, pick this moment?

Here's the dirty little secret: The Market can't focus on EVERYTHING.

It just can't. The Market (i.e., the investing public) doesn't have the mental bandwith to factor in every variable. So it can only focus on a few issues at a time, usually the ones that appear most urgent or emotionally charged.

Avoidance works. And a problem isn't a problem until we decide it is. That's what makes a bubble. A whole bunch of people decide to ignore a problem... until they don't.

So instead of getting a relief rally for defusing the debt-ceiling time bomb with 1 second left on the clock, we got a renewed attention on some significant problems. The rose-colored glasses are off... the shades are on. And they have given people a dimmer view of our plight.

It's actually quite ironic if you think about it.

If we had chosen to raise the limit and ignore the problem - just as we've been ignoring it for years - August 2nd would have come and gone without incident.

When we decide to, you know actually address the problem for once... we are "at risk for a downgrade".

Hardly seems fair, really.

MarketPsych's Co-founder and resident genius, Dr. Rich Peterson, has a fascinating post below on what the implications may be. We invite you to check it out.

In the mean time, happy investing.

And hey... let's be careful out there.


-Dr. Frankenstock

Frank Murtha, Ph.D.