The single most important factor that moves stock prices is investor psychology. You could be an awesome number cruncher or a rocket scientist, but, at the same time, you could be a lousy equity investor. Market psychology is the key to both short- and long-term gains when you’re investing.
So, the best way to get a handle on stock market psychology is to follow the market on a daily basis. You need to know what the broader market is doing, as well as what’s happening in commodity prices, currency prices, and business. It sounds like a lot to keep track of, but it really doesn’t take too much time to stay on top of the market. When you make this effort, you’ll really start to develop your own “feel” for the market, which provides the basis for making great investing decisions.
Look back in late 2004 and early 2005, you can see oil prices and energy producer stocks rising dramatically. All you heard about in 2004 and 2005 was China’s growing economic strength, and, naturally, prices for raw commodities began to rise. (By the way, my biggest prediction for 2006 is that precious metal prices will soar. Like oil and gas was the big news in 2005, newspaper headlines in 2006 will be all about metals.)
Investor psychology is what led us to promote alternative energy stocks early in 2005. The price of oil is going up, and, as such, the price of oil and gas stocks is going up. Hence, stock prices in solar panel and pollution control stocks should go up.
At the end of the day, good investing really does come down to basic common sense. And, if you don’t see any glaring opportunities at a particular point in time, rest easy with your capital invested in a money market fund. Follow the financial markets religiously, and good opportunities will jump out at you.