Stock Markets Analysis & Opinion

Prices Drive Market Sentiment, Not the Other Way Around

  • After November’s surge, investors are wondering if December will sustain the trend.
  • In an era where the average equity holding period is merely 6 months, this is understandable.
  • But in the grand scheme of things, a month’s performance should not deter investors from their long-term goals.
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After experiencing one of the best Novembers in the past 23 years, investors find themselves contemplating whether December will continue this trend or if things are about to change.

At this juncture, this is the key question they should ask themselves:

Does the performance of a single month truly hold significance in the grand scheme of things?

While the conventional perspective may perceive the significance of a single month, especially given the unfortunate reality that the average holding period for modern equity investors is merely 6 months, the initial approach is fundamentally flawed.Market Sentiment

Prices Drive the Narrative

Right now, investors are gradually returning to a phase of risk-on, i.e., rising risk appetite and (therefore) more boldness, less caution, and more greed.

This is precisely because prices went up a lot in November. So once again look at the inconsistency (and wonderful opportunity for those who can understand it and use it to their advantage) of the markets:

Prices are going up ==> Higher valuations ==> Optimistic investor psychology ==> Potential downside risk rising ==> Perception of risk among investors falling

So just as risk is increasing, investors become more unscrupulous.

Conversely, with prices and morale at the bottom and with risk in freefall in October 2022, no one wanted to invest.

It is a wonderful world, and for those who begin to learn this simple but essential concept, immense opportunities can open up.


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