How investors think (maybe)

Though Technical Analysis ("by the charts") is often maligned, some think of it as a reflection of investor thinking.

  1. The stock price is going up. Investors are euphoric and think "It's on a roll! I'll buy!" ... driving the price up even more.

  2. The stock price is going down. Investors are pessimistic and think "It's goin' South. I'll dump my shares" ... driving the price down even more.

  3. The stock price stops going down and starts up. Investors are exuberant and think "It's recovering! I'll buy now at this low price ... driving the price up even more.

  4. The stock price stops going up and starts down. Investors are cautious and think "That's it! I 'll sell and lock in my gains ... driving the price down even more.
Presumably, if all (most?) investors have the same (similar?) mind set, one should be able to identify patterns of behaviour by examining patterns in the stock charts, right?

>And if they don't think the same? If they're buy-and-hold types or momentum types or mutual fund managers or ...
Then we'd expect no (few?) recognizable patterns, eh?
But suppose we assume different types of investor-think. Suppose ...

For example, my wife and I have different philosophies 'bout investing.
She's cautious ... I'm not. She's a pessimist. I tend to be an optimist.
In situation #1 (above), she'd sell. I'd buy.
In situation #2, she'd sell. I'd buy.
In situation #3, she'd buy ... and so would I.
In situation #4, she'd sell ... and so would I.

>And the "typical" investor. What's s/he do?
I have no idea, but it'd be fun to assume both types of investors and see what happens to stock prices subsequent to the four situations depicted above.
Perhaps it's a battle, a competition between investor types. Who wins ... and determines the subsequent stock behaviour?

>Haven't you done something like this before? I vaguely remember ...
Yes, in connection with the Directional Movement Indicator where there are Bulls (that's me) and Bears (my wife).

>Your wife wouldn't appreciate your calling her a Bear. I think ...
Pay attention.
We'll examine a gaggle of stocks and look for the four patterns depicted above to see how the stock fares after that.
perhaps we can identify the four patterns like so:

  1. The current stock price is greater than all the prices over the past n days.
  2. The current stock price is less than all the prices over the past n days.
  3. Like situation #2, but with the current stock price greater than yesterday's price.
  4. Like situation #1, but with the current stock price less than yesterday's price.
Let's try it, eh?

Stock is Increasing

Let's start with situation #1 and check when & where the following criterion is satisfied:
CRITERION #1:   Current Price is Greater than the Maximum Price over the past N days
>What happens after that?
That, my friend, is the question.
Here's a spreadsheet that:

  • Downloads your favourite stock or Index (like the DOW: ^DJI).
  • Identifies the places where the CRITERION is satisfied.
  • Let's you move from one place to the next to see the subsequent stock behaviour.
  • Let's you ...
>But what can you conclude from all that stuff?
Conclude? Conclude? It's a game. Just play.

Click on the picture to download the game:

>And Criterion #3 or #4?
It occurs to me that the volume may play a role here ... so I stuck that in, too.
Maybe if the price goes up and the volume does, too, then ...

>Then there's momentum, right?
I suggest you download the spreadsheet, play, activate grey cells and generate your own analysis.
If you can come to no conclusion after trying umpteen stocks or indexes, at least you've enjoyed the journey, right?

>Wrong! Besides, I thought you were reading Ariely's book in which case ...
Yeah, yeah ... there's nothin' rational about Buy & Sell decisions.
However, it'd be interesting to know why the 10th month usually has the greatest volume of trades, eh?

>What's the 10th month?
The month that has all them market crashes: October.

To get stock data from other countries, ya gotta know the Yahoo symbol.
Append .BO for Bombay, .DE for Germany, .L for London, .TO for Toronto, etc. etc.