Getting a Good Read on Market Psychology
Thursday, July 19th, 2007
By Mitchell Clark, B.Comm. for Profit Confidential
With all the good news in the large-cap sector of the market, small- and mid-cap stocks have taken a backseat. With the Dow Jones Industrial Average up around 30% in the last 12 months, it’s difficult for smaller companies to compete with this kind of performance.
I wrote earlier that in my experience, there seems to be fewer great small-cap investment opportunities this year as compared to 2006. Not to say that we haven’t had some great small-cap winners so far; only that my market research seems to be yielding less in the way of really attractive buying opportunities.
The kind of stocks I’m referring to are those that immediately just jump out at you when you’re doing market research. These are the kind of investment opportunities that you know in your gut will turn out to be great successes. There are far less of these in the market right now.
Although I can’t prove it scientifically, I’ve always contended that great stock market opportunities have a tendency to occur in waves. I’m still not sure why this is. I think it is a combination of the right economic conditions commensurate with the right amount of investor enthusiasm.
Investor sentiment and market psychology are probably the most important influences on the movement of stock prices. If you know that the stock market wants to allocate a lot of capital to China stocks, then the successful speculative will seek out and own the best China stocks. If the stock market is keen on precious metals, then you’ve got to own some precious metals.
In my experience with picking stocks, getting a good read on market psychology is much more important than compiling a lot of numerical data. The numbers are important, and you have to know what you’re investing in; but unless the rest of the stock market is interested, then your holdings won’t generate the kind of gains you expect.
Naturally, the best way to develop a strong gut feel about the market is to follow it every day and take in as much information as you can. When it is earnings season, why not read every financial report that’s released? Just like golf, practice makes perfect.
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Tags: chinese stocks, Dow Jones Industrials, earnings season, small-cap stocks, stock market, stock prices
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Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.




