In the market as in life, perception always trumps reality. In one year the mantra is that it doesn’t matter what you pay for the new paradigm Internet stocks – the next year many of those same names are out of business. One year the oil is going to $200 a barrel and the next year it trades in the 30's. For at least 5 years into 2003, US Steel Corp couldn’t catch a break and was close to going out of business, for the next 5 years it couldn't produce enough steel to meet demand. One year it’s all virtual and digital, a few years latter it’s back to basics and basic materials with brick and mortar outshining the net. Let us not forget that at one time Lucent, the spin off of AT&T, was the single largest owned name in the United States. A few years later it was trading under $3 and its technology virtually obsolete. Did the underlying fundamentals change that drastically and that quickly or did the underlying perceptions simply get discredited rapidly?
If you go on the assumption that perception trumps reality your decision making can be derived from the idea that it is the state of mind of the masses that determines the fundamentals rather than the other way around. Our world is the image our brain constructs prompted by neural relationships, i.e. patterns. We do not know how real the mental images are relative to the objects they refer to. All our memory exists in ‘stored’ form--in other words beliefs that are not currently being considered by the mind but stored in memory waiting to become an image or action. We construct these images in a constant flow of pattern-recognition and memory retrieval. This flow constitutes our consciousness. Basically, we think in images.
Past patterns in the stock market in price and time will tend to affect the mass of market participants whether consciously or subconsciously. We never experience the “present” as a unique singular moment; it is a flow of images in the context of the world around us and the world before us, literally, and figuratively. In the cognitive process, we endeavor to create meaning. Meaning gives us a sense of security and control. We constantly look for patterns to match them with something stored in our memory. Learning is pattern seeking - the constant up and down of the stock market is the supply and demand of trying to make sense on multiple time frames (i.e. short-term and long-term).
The interaction of perceptions and interpretations in the market creates a constant information flow which in turn changes forthcoming interpretations. Sometimes that flow is interpreted as meaning. The thing to consider is not to confuse information with enlightenment. We try to make sense all the time and communicate this to others. A single individual communicates to another individual, then to a group, then throughout society and the cultural dynamics that create what we call trend.
For example, the coincidence of Obama saying stocks ‘may represent a value’ and Bernanke saying he sees 'green shoots' within days of the beginning of the largest rallies in a decade. Subjective vision becomes ‘accepted’ by followers if there is a convergence or coincidence of the idea. Being ‘trendy’ simply means to comply with a present state of idea within the market place (or society). A market trend can also be described as a trajectory of constantly and dynamically changing ideas within an overall pattern of price and time. We look for a pattern and create a narrative around it.
A trend is perceived as a correlation of patterns. The longer a trend has persisted and the more force it has demonstrated in a change over what preceded it, the observed trend is obvious. Yet we are always forecasting. We build patterns into the future. If we did not continuously infer into the immediate future, we would be constantly surprised by the present. In life as in the markets in the process of making sense, we inevitably project our own beliefs and expectations.
Likewise, because we are innately pattern seekers, it is all too easy to see patterns and to deduct connections which are not there. To arrive at a strategy that is useful, it is necessary to see the big picture first and always see the big picture. Something that is difficult as we can all too easily get swept up by the momentary story and act on emotion. The driving force of every trend is an idea of a world which lies in the future. We imagine the future. The question we should stop and ask ourselves is: does somebody else imagine this future for us or do we imagine it ourselves?
