Dan, CC, and I are all of a contrarian bent. Many years of experience trading has taught all of us to be skeptical of the easy trade, of joining the crowd when everyone is feeling good. An important psychological lesson that markets have taught me is the following:
People act based on how they feel, not based on what they know.
I would argue that the common investor’s knowledge at this point makes him or her quite aware of the many obstacles that lie ahead, economically, politically, and socially. But for the past 3.5 years, buying any market pullback has paid off within 6 months. So investors and traders of that Pavlov bent FEEL good pushing the buy button, not the sell button, despite what they might know.
For the past 2 weeks, this rally has made me want to start getting long too. It would ease the pain of going against the crowd. Despite what I know, I want to join the winning camp. Because it will feel good.
I have fought that urge. I continue to think that markets are far too complacent. And I refuse to act on simply whatever cures the pain.
Markets overnight continued their tight overnight ranges. SPX futures are indicated down 0.1%, Europe is flat, and Asia closed mostly flat. Treasury bonds, currencies, and commodities are all close to unchanged as well. Economic data this week is relatively light. The minutes of the FOMC meeting on Wednesday attract the most attention, 2 weeks before the next FOMC meeting, with QE3 speculation still rampant.