Wednesday, March 01, 2006

Wall Street Psychology

I heard a recent discussion on Bloomberg Radio with Stephen Ross professor at MIT where he briefly touched on the subject of Finance and the psychology of the markets.

The professor seems to dismiss this as a trend with little basis in reality, but I'd strongly disagree. Wall Street today is influenced to amazing degree by the hedge fund business. Hedge Funds, particularly the big option players are major short-term traders that move markets. Many of the newer hedge funds are a less disciplined than their predecessors and they tend to be very heavily influenced by the dynamics of the trade rather than the fundamentals of company XYZ.

Much of the large option and stock trading that we see today, I speculate is coming directly from Permabulls (those people that consistently see the bright side of bad news) or Permabears (vice versa). There are very few traders and hedge fund managers willing to interpret information as it's received and change their viewpoint.

Because of this trend, we are in a precarious position. If momentum swings from the Institutional Permabulls to the Institutional Permabears, the market could face some challenges in 2006-07.

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