The Changing Moods of the Stock Market

It's no secret that the stock market is primarily driven by two sentiments: the fear of evil and hope for good. Within these broad emotions, we encounter speculation on rising share prices and the anticipation of future earnings. Conversely, we also find the fear of falling stock prices, economic crises, recessions, and collapses.

I devoted part of my university studies to understanding moods—what they are and how they change. Therefore, it’s not surprising that this topic also interests me in the context of the stock market.

How I analyze the stock market

A mood directed towards the future, such as hope for growth or fear of downturns, can be observed through various data. I find it logical to track asset prices within specific segments (geographical or sectoral) in relation to how these segments generate earnings and their value. I compare this data with historical data within the same segment, data from other segments, and the entire stock market's performance.

I have been following data on various indexes and ETFs for years

I use data published by various indexes and ETF funds. As you might gather, I am not analyzing individual shares but collections of shares grouped by specific criteria (read more about stock indexes and ETFs). Since 2022, I have been tracking this data, documenting what the media says about the economy and the stock market, and noting factors that could influence sentiments. This forms my “mood thermometer.”

My reasoning is straightforward: when the price of assets in a particular segment is higher compared to their current value than it was in the past, or if it deviates upwards from other segments that were previously at a similar level or the entire stock market, I interpret this as a greater presence of hope for future growth.

However, to avoid any misunderstanding, let me reiterate that I am not interested in asset prices in isolation but always in relation to a specific indicator of their current value. For me, if the price increases in line with the asset's value, and vice versa, it does not signal hope or fear for the future. Simply put, I am not as focused on the price graph that most retail investors look at.

Of course, one cannot rely solely on moods. The next step is to assess whether there is a justification for the prevailing sentiment, considering the probability of various scenarios for the world, the economy, and the specific segment over the next 10, 20, or 30 years. This is challenging, and evaluating it for a particular company is even more so, which is why I do not invest in individual shares, as I have mentioned before.

Now, how can this information be used in investing? That is a discipline in itself. I hold assets for the long term, so I am interested not only in the mood but also in the likelihood that a particular segment or market will be better off in 10, 20, or 30 years than it is today. If the probability is high and there is significant fear about the future in that segment, it gives me an additional reason to consider investing in it. Why? Because it's cheap.

Conversely, if I hold a segment and there is a very high hope of future growth, it prompts me to take a closer look and possibly reduce my position. However, it is crucial to consider the specific segment, the context of the current mood, and the likelihood that fear or at least a sobering effect will not hit the segment soon. Additionally, it’s important to assess whether the segment will perform so well in the next 10, 20, or 30 years that any temporary corrections due to fear will have minimal impact.

In the end, I will just say that even though I enjoy this area, I have devoted and will continue to devote a lot of time to it, I am not as proficient as I would like to be. It is an intellectual challenge and an adventure for me. And that's how it should be taken. Therefore, I do not give any specific recommendations or mention any specific segment or data. It's a complex topic where there are no shortcuts, and I don't want anyone who hasn't spent enough time in this area to make the wrong decision based on misunderstanding something in this article.

Stock market analysis is as much about understanding the human mind as it is about analyzing numbers. Over the years, I have found that staying attuned to my emotional responses to market fluctuations has helped me better navigate the complexities of investing. By recognizing when I am influenced by fear or hope, I can make more rational decisions that align with my long-term goals.

This self-awareness is crucial because the stock market is not just a collection of financial instruments; it is a reflection of collective human emotions and behaviours.

Embracing this perspective has made my investment journey a real intellectual adventure. And ultimately, that's what I'm seeking in life.