I like to think of markets and securities in terms of three separate but interrelated dymanics: fundamentals, sentiment and technicals. Fundamentals include things like earnings, net asset value, how those things are trending and valuation relative to them. Sentiment is simply how investors are feeling toward something and technicals are really just a way to analyze the price trend.
Typically, a security or a market becomes expensive as a result of good fundamentals leading to positive sentiment and a strong uptrend. The valuation eventually becomes overextended, sentiment becomes too bullish and momentum begins to wane. It is at this point the trend reverses. Sentiment will start to turn as the trend turns downward. Momentum will peak roughly midway through the trend. Valuation eventually becomes reasonable or even cheap and sentiment turns sour as a result of a prolonged downtrend. Eventually downside momentum wanes and the trend reverses again, usually just as sentiment bottoms out. Read more…..
Chart of the Day
Robert Shiller, Sterling professor of economics at Yale University and a Nobel Prize winner, and Ed Clissold, chief U.S. strategist at Ned Davis Research Group, discuss how rising fear levels and high stock prices could impact markets. With CNBC’s Bob Pisani.