The Market Pendulum

• Posted by Robert Sinn
• on June 6th, 2012

“When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.” Howard Marks (The Most Important Thing)

This morning’s rally may temporarily wash away some of the fear that has been so pervasive recently. However, it is worth remembering that just 48 hours ago the S&P 500 ($ES_F $SPY) was trading 40 points lower and there were very few who were willing to take on more risk. This is characteristic of the market pendulum – the market swings like a pendulum between fear and greed, euphoria and depression, overbought and oversold, overpriced and underpriced, etc.

Marks goes on to write: “But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward an extreme itself that supplies the energy for the swing back.”

This morning’s rally appears to be a perfect example of a movement toward an extreme supplying the energy for the swing back. As astute market observers we should be cognizant of this process and always keep the market pendulum in mind, particularly during tumultuous market environments.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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