Market Analysis

Bad Conation

When investors get jittery, they tend to believe one issue, and one issue only, moves stocks. That's a classic sign of a bull market correction and not a new bear.

Buddhists tell us consciousness can be viewed as a form of directed attention. Just where and how that attention is directed, and how we act upon it, is largely up to us. This is generally referred to as the principal of conation.

When conation goes out of balance, we see the world wrongly, and thus act wrongly because of it. That being the case, we'd say stock markets today are in the midst of a chronic case of bad conation.

MarketMinder has outlined the classic features of a correction before. (See our past commentary, "Corrective Measures" 8/3/07.) But there's another common correction feature we've yet to mention.

When sentiment becomes irrational to the point that most believe one issue—and one issue only—is moving stocks, it's assuredly a form of bad conation. That's precisely what we've got today.

By today's headlines, you'd think credit markets were the only issue relevant to stock movements. "As credit markets go, so go stocks." That's the underlying mantra in the financial press today. Through the course of bull market corrections, it's the same story over and again. "As the dollar goes, so go stocks," or "As the carry trade goes, so go stocks."

Thinking this way is not just poor investing, it's near crazy. When one issue becomes the total, myopic focus of the market, it's just about always a sign of irrational sentiment. Investors know very well in their heart of hearts the stock market has a multitude of factors acting upon it at any given time. When markets ignore that simple notion, they're failing to consider the fundamentals and investing becomes solely emotion based.

For instance, how many front page financial headlines have you seen about earnings lately? Earnings continue to surpass expectations, but no one seems to think it's worthy news! Through August 10th, 447 companies in the S&P 500 have reported earnings for the second quarter. Of those, 66% reported earnings above expectations. The blended growth rate of S&P 500 earnings is now at 7.9%! That's well above the meager forecasts at the quarter's outset. This is very bullish news, and it's being generally ignored.

When the media gets focused on one issue alone and ignores the rest, it just isn't Zen. MarketMinder readers keep the broad, global view—and still see a very strong economy with cheap stocks for sale. Don't let the headlines alter your consciousness.

Source: Thomson One Analytics

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.