In his 2002 best-selling book Conquer the Crash, Bob Prechter coined the phrase "Slope of Hope" to describe the emotional direction in which the mainstream public descends in bear markets.
The gist: After enjoying a sustained period of gains, confidence is so ingrained in the public consciousness that those in charge can't conceive of losses -- even as the market itself begins to reverse.
It's this very irrational optimism that led the world's largest economy in trouble in the first place. When the real estate bubble burst, the mainstream experts saw every decline in home prices as a "healthy correction" certain to be retraced. The subprime implosion, wasn't that supposed to be a "contained and isolated" event? The credit slump: No worries, they said. That was a "temporary" setback with little risk of wider fallout. And, last but not least: Every downturn in the Dow Jones Industrial Average from its October 11, 2007 all-time peak was forecast to be but a "brief hiccup" on the way to higher highs.
Big or small, all it takes is a steady winning streak for the usual suspects to see every rise as permanent -- right before the fall. Case in point: Since landing at a multi-year low on November 20, the Dow Jones Industrial Average has soared more than 15%.
And, according to the slew of January 6 news items featured below, the near-term picture for stocks was Up, Up, and Away.
- "Wall Street brushed off more bad economic news to finish with a moderate advance that left broad stock indexes at their highest level in two months. I think people are cautiously optimistic; they are hopeful that the Obama administration is going to get the economy back on track." (AP)
· "Stocks rise amid optimism that Obama will boost the economy with the largest infrastructure investment since the 1950s. It's hard not to be positive given how much stimulus is coming through the pipe." (Bloomberg)
- "Investors are feeling more comfortable that the worst is behind us. The thinking is that the market is at a trough, therefore, with the stimulus being talked about, that's all positive." (Reuters)
-- VERSUS --
This January 7 headline: "Jobs Data Sends Street South" (DJ MarketWatch)-- as the DJIA plummets more than 250 points in late afternoon trading.
See, while the mainstream experts perceived the re-emergence of investor optimism as a sign of the market's inner strength, the January 5 Short Term Updatesaw it as a sure sign of weakness. In STU's own words:
"There's a good deal of 'hope' present as the market leaves a horrid 2008 and enters 2009, particularly with a change in political administrations coming. Hope can be a deadly emotion now. As such, we'd rather be slightly early that too late in anticipating a countertrend high."
Don't be ruled by emotion. Get objective analysis of the near-, and long-term trend changes in store for the world's leading financial markets today.
Click here for a risk-free,
Financial Forecast Service subscription.