Bear Mountain Bull

More free Jeff Cooper this morning:

If the stock market is a manifestation of crowd psychology, it leads a life of its own — it has a mind of its own with its own internal clock. If the intelligence of the crowd is not the average intelligence of the individual, the behavior of the market sinks to a level which is separate from and below the intelligence of individuals.

A crowd does not think or reason, it reacts emotionally. To read the mind of the market, we must listen to the music of the market’s mood.

The changing feelings and sentiments of investors drive the fundamentals, not the other way around.

The current conviction running rampant is that kick-starting the animal spirits is the appropriate abracadabra because the full faith in the government and the belief that the market always came back has always worked — eventually.

The problem is, eventually is a long time. The problem is that what was once the full faith and credit of the US and the dollar has been pared back to the full faith part of the banner: credit has become contingent on the kindness of strangers. Despite the aggressive rally since March, the idea that the market always comes back has been severely tarnished. The idea that the government always saves the day and is the solution is still alive but in the fight of its life. Judging by the acrimony at recent town hall meetings and the response from the administration, the new motto of the government feels like it has become “No Representation Without Taxation.”

The symbiotic relationship between government and Wall Street is being bought by the financial markets — literally. It’s not just that financial markets believe in the government — they want to believe, they have to believe. They have had little alternative since essentially both were part of the problem.

Main Street is not so sanguine. A new downturn and a failure of green shoots to magically manifest into redwoods could send a severe psychological shiver. Question: if crisis has been completely stemmed and we’re on the road to recovery and the government has used all its bullets, a failure of the party line and a second dip should cause the power of the government to be questioned. Disillusionment could cause what might be a second dip in otherwise less virulent great recessions to become more pronounced. At best it could translate into a long period of bumping along the bottom. At best it could accelerate a downturn with a hope-filled V going from a W to a Y.

Few of the technical analysts on the Street today have ever traded through a secular bear market. Nor have many of their indicators. This is the first secular bear market where technical tools and indicators have been democratized to a large degree by the computer and the Internet. There’s a lot of belief being placed in a lot of indicators that have not proven themselves in a secular bear market. In my experience, the thing with most technical indicators is that while they may have worked well many times, they can fail you when you need them the most — Anthill Indicators. Moreover, most technical indicators are descriptive, not predictive. Cycles and the price patterns they trace out in their rhythmic motions speak to the mood of investors’ emotions: the music of the market rises and falls, undulates and seethes with the mentality of the mob, the sentiment of the crowd. Last week the Daily Sentiment Index hit a new high of 88% bulls. The last time this level was hit was in October 2007. Why was there so much bullishness then… the crisis was over? The belief in the Fed and containment was widely embraced. The Street bought it hook, line and sinker. Literally.

Follow the link for the rest of his market take.