As computers continue to dictate many of the trading decisions of the 1990s in both the stock and futures markets, fundamental economic data appears to have less and less relevance in the daily heat of market trading. However, when you step back and take a look at the big picture, it makes more sense to examine some of the economic factors that contribute to a market psychology, for, in spite of technical analysis, there is a psychology to the markets that ultimately determines price direction.
I have operated in the leveraged medium of futures for nearly two decades, so for me, success is more dependent on the timing of a particular trade rather than on any particular assumptions I may have from evaluating the fundamental supply and demand factors. Consequently, because I base my trading decisions on mathematical concepts, I could be placed in the technical camp of trading and market analysis.
Personally, I like to have a handle on the big picture of a market, and at the moment, all anyone can say about the stock market seems to be a variation of the following:
1) Yes, the stock market is overvalued by traditional standards, but times are different now.So with that in mind, I decided to take a look at an aspect of the markets that is very real to all market historians, that aspect known as "investor psychology." I have lived through two market bubbles, the real estate inflation boom of the 1970s and the gold and silver markets that peaked out in the 1980s. These events in market history where market psychology became firmly affixed with a particular mindset helped perpetrate market prices well beyond realistic levels measured by value. Ultimately, the market tops out when the last buyer buys. (And no market is immune to this statement.)
2) The stock market will eventually top out, but there is nothing out there to indicate that a top is approaching yet.
3) The top in the stock market will come from a surprise.
4) As long as we have low interest rates and low inflation, the stock market has no reason to top out.
5) Demographics of the babyboomers will drive this market to a 10,000-level Dow Jones Industrial Average (DJIA) and more over the next five to 10 years.
6) Yes, a correction is due, but it will be the greatest buying opportunity of this decade.
