There is an old stock market axiom that “prices climb a wall of worry.” The sense is that prices go higher when there is a background of negative sentiment and attitude.
And when prices are rising without negative noise, we invent the gloom and doom. For example, yesterday’s preopening comments in the newspapers sounded something like this from the Philippine Star: “The stock market is looking for fresh leads such as interest rate or foreign exchange movements to determine the direction of trading this week, analysts said.”
The Philippine Stock Exchange closed at a 10-year high yesterday, up 56 points to 3,141. After-closing comments from the “experts” referred to the same general “the economy looks good.” Notice that there were no “fresh leads” specifically related to interest rates or foreign exchange that propelled the market higher. Yesterday’s upswing was a continuation of the last six months’ bull market.
No matter how many times I express a positive outlook here in BusinessMirror or on television, I am still asked about those factors that could bring the market lower. I feel compelled to offer something more substantial than simply saying “nothing.” I am running out of answers like “war against Iran” or an attack on Taiwan by China, having almost reached the point of talking about UFOs occupying the floor of the exchange.
Normally I would be concerned about comments like this from one local stock analyst: “There is no negative news that could spoil the momentum at this point.” However, I know well enough that there will be enough skeptics out there that will keep the negative background noise alive and keep share prices rising higher.
Why do prices climb a “wall of worry” and why would we want the “gloom and doom” crowd to continue to wail and gnash their teeth?
There are two players in the stock market: buyers and sellers. These two participants are motivated by greed and fear, respectively. Buyers believe that stock prices will never be any lower than they are today, greed and optimism; sellers believe that prices will never go any higher, fear and pessimism.
However, there is a third emotion beyond greed and fear that also dominates the market and that is “worry.” “Worry” attacks both buyers and sellers and has to do with the concern that they might have been late in acting on their respective greed and fear. Yesterday’s trading action provided a textbook example of stock-market emotions and how they move the market.
Prices opened up slightly and there were “no fresh leads.” Sellers came in, worrying that they might miss the opportunity to get out at prices that would not go any higher. A little after 10 a.m., the market stretched to the psychologically important 3,100 level on the PSE index. Again, sellers rushed in fearing that 3,100 would be the top. Buyers, at the same time, were greedy, wanting to take positions before the 3,100 was breached.
An hour later, once again fear gripped the holders of shares as the market seemed stuck at 3,100, seemingly not wanting to go higher. Besides, sellers thought, how can prices go higher when there are no fresh leads? With the index at 3,110 at 11:15 a.m., the sellers’ fear took over the market. All morning long, the market climbed a wall of worry, primarily the “no fresh leads” angle, from 3,085 to 3,110. Then the seller’s emotion of fear stepped to the sidelines and the buyer’s greed enters the scene.
Having broken firmly through the 3,100 level, now the buyers started to get very greedy and very worried about missing the rally. The last 45 minutes of trading saw prices move in one direction: up. The index rose from 3,110 to close at 3,141. The market staggered to move all morning long to gain 25 points to see a 30-point gain in less than an hour’s trading.
Understanding stock market price movement is not always about the numbers. It is always about the buyers and sellers and what their emotional motivations are at any given time.
E-mail comments to mangun@email.com.
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