The moment I realized that emotions move markets
By Paul Reid
16 December 2023
Every morning, I make a cup of coffee and turn on the financial news. I roll my eyes as presenters mix fractions with decimals, announcing that a particular stock fell a quarter of a percent yesterday… which really means nothing… not even to a day trader.
Simply, those economic reports and data releases might cause a hiccup on the charts, but that’s not what truly moves markets.
Which brings us to technical analysis. Indicators and charts don’t move markets either. An overbought Stochastic signal doesn’t always mean that everyone is about to sell and prices will fall. Those traders using the Stochastic have little to no market impact anyway. The big investors with enough equity to move the markets don’t follow such signals, their actions influence them.
That’s the real force behind market shifts… investor sentiment. And market sentiment is not a fact-based influence, it is pure and collective emotion. Like the first scream in a burning building, fear can create hysteria and tip the market in minutes.
For example, on February 6, AI fans were anticipating Google’s entry into the artificial intelligence domain. Finally, Google unveiled Bard, its new AI chatbot. During the demonstration, Bard shared inaccurate information, which was captured in a promotional video and presented at a company event.
Sentiment flipped quickly, and GOOGL tumbled 7.7%. But consider this, AI is not a money maker for Google yet. The majority of Google's income comes from advertising, which is largely facilitated through its various platforms such as the Google Search engine, YouTube, and the Google Display Network. Why would an AI hiccup affect market share so radically within a few hours?
Such simple errors are seen in all AI chatbots, but that one tiny oversight cost Alphabet Inc. $100 billion, even though, to this day, that mistake has had no measurable impact on Google’s revenue streams whatsoever.
That was the day, the moment when I accepted a nagging suspicion that I’d been ignoring since the 2020 Bitcoin rally. Emotions rule the markets.
Collective emotion is what causes panic on Wall Street. Emotions fuel epic rallies and elevate emerging tech companies, even when the innovations have no immediate profit potential.
So the next time you turn on the financial news or check the charts, ask yourself a simple question. How could, what you are seeing at that exact moment, affect global sentiment?
For example, if there is war, don’t ask if it might affect the supply and demand of oil. It might, but not today or tomorrow… but it may already be affecting sentiment.
If a stock chart shows a long rally rounding, right after news that the CEO was replaced, don’t ask if the new leadership will cause company profits to fall or rise, ask if the collective minds of investors will experience positive or negative emotions from the news.
The moment you realize that emotions move markets is the exact moment you’ll be putting your finger on the pulse of the financial world, and that realization will make you a better trader.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.