The 14 stages of investor emotions and trading psychology

OPTION ALPHA/Kirk du Plessis/2018

“The chart below is a visual representation of the 14 stages. . . This would be a great visual to print out and put in your office or desk to remind you to ask yourself: ‘Where am I right now?’”

Courtesy of OPTION Alpha / Click to enlarge

Jonathan Kosares note: It’s no secret investor emotions can have a profound impact on a market’s price action. From Euphoria, to Fear, to Panic, to Capitulation, each stage in a market’s ascent, or decline, can be assigned a particular emotion. Sometimes, such assignments are easier after the fact – sometimes they’re clear in the moment (Bitcoin ~$20,000 I’m looking at you). After two 1000+ point drops in the DOW last week, I began to wonder to myself what ‘emotional stage’ we might be in with the broader stock market at this point. I did some looking around, and found this phenomenal chart.

After reading the author Kirk du Plessis’ description of each emotional stage, I figure we’re somewhere smack dab in the middle of Anxiety, with a sprinkling of Denial. He describes the Anxiety/Denial stages as follows:

5. ANXIETY – Oh no – it’s turning around! The markets start to show their first signs of taking your “hard earned” gains back. But having never seen this happen, we still remain ultra greedy and think the long-term trend is higher.

6. DENIAL – The markets don’t turn as quickly as we had hoped. There must be something wrong we think to ourselves. Our “long-term” view now shortens to a near-term hope of an improvement.  Also note in the chart the bubble note…”Temporary setback.  I’m a long-term investor.”

Take a look at really any article out regarding the stock market right now, and they all say basically the same thing. “Buying opportunity.” “Long-term investor’s shouldn’t be concerned.” “Just a correction.” “Don’t Panic!” “Fundamentals are still strong.” “The market went up really quickly, so it only makes sense it would decline quickly too.”

A sampling if you don’t believe me…

Stock Market Got You Confused? – CNN Money
Don’t Panic:  Three Things Investors Should Do During a Correction – Forbes
Why Long-Term Investors Shouldn’t Sweat the Stock Market Correction – TheStreet.com

The characteristics (and language) of the Anxiety and Denial phases written into these articles is palpable. Just turn on CNBC for 10 minutes on one of these down days and you’ll get more of the same. And what’s interesting to me, is even though most articles out there have used the word ‘fear’, I don’t think we’ve even sniffed the “Fear” phase yet. But make no mistake about it – and despite the ‘relief’ bounces we’ve seen over the past few days – an ‘emotional’ shot has been fired across the bow. Two shots actually. And we’re probably just one more of these big tests to the downside away from full-on Denial, which will ‘hot knife through butter’ it’s way to the Fear phase. And then, look out, as it’s the Desperation/Panic/Capitulation phases that are typically associated with the biggest price declines.

But what about gold? Probably somewhere between Depression and Hope in my estimation. Retail investment demand remains down at multi-year lows (despite some forward progress on the price), but is showing signs of life. National anecdotal reports suggest that client selling at the retail level, a year ago overwhelming, has begun to subside.  And even recently, open challenges regarding the validity of gold’s ‘counter-cyclical’ foundation as an investment (i.e. why isn’t gold rising with the volatility in stocks) have been met by analysis/commentary from the most unexpected of places.

So my parting thought to our readers….

Which asset would you buy? The one gyrating frenetically between Anxiety and Denial, or the one quietly making it’s way from Depression to Hope? I, for one, would choose the asset glancing in it’s rearview mirror at the “Point of Maximum Financial Opportunity”

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