Monday, June 15, 2009

The Herd Mentality

There is an old saying in the financial markets and it goes something like this: when the majority of traders and headlines agree that the market is going up or down - that is when it changes and does the opposite. Last week the Trade Idea Monitor from youDevise noted that 73% of institutional brokers were recommending that their clients go long. The number of long ideas compared to short was up by almost 100% from the week before. Bears finally turned the corner and said 'OK, I guess this isn't a bear market rally after all. It is the real thing.' Then, wallop! Monday morning comes around, the Kool-Aid hangover kicks in and the market plummets. I have long suspected that traders and investors are sheep-like in their behaviour and my friend Gerald Ashley explains it nicely in his book 'Financial Speculation': "The herd atmosphere amongst fund managers is so strong these days, and the fear of scrutiny from outsiders so great, that they seem to prefer to act together and be wrong, rather than risk being different, original and creative."
And for those sheep out there who believe that the banks have truly repented and are now on their merry way to loosening up credit, I have one thing to say. Refinancing my house has now been underway for 60 days and counting. The bank in question is doing its absolute utmost to drag its feet so as not to give me the 4.875% that I locked in for 90 days. My husband and I make good money, have excellent credit ratings, and are in no way overextended. I get the impression they are trying to hang onto their money until interest rates go up. FDIC take note.

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