Newsletter – May / June 2008 – Market Psychology

Market Psychology: Challenges of CastleMoore’s Contrarian Style

The stock market is not solely about good news or bad news. It’s really about the context of the news. Sometimes, bad news can be good. Let’s review the first quarter of 2008.

The New York stock exchange had peaked in mid-autumn 2007. In January 2008 the sell off started in earnest.

And there was good reason to sell. First there was the US Junk Mortgage problem. Millions of Americans could no longer afford the mortgages on their houses, banks were foreclosing and home prices were falling. Banks were in trouble all over the world. Was the banking system at risk because of this messy mortgage mega-problem?

As if that were not enough, a prestigious Merrill Lynch economist was forecasting a recession. Before long, a chorus of economists were all singing the same song: negative growth for the first two quarters of 2008; the mortgage problem had spread to the economy.

These events threw big money investment managers into a serious tizzy. Having ushered in the year 2008 with their portfolios significantly over-weighted in bank stocks, now they were all rushing for the exit. The Dow Jones Industrials dropped over 11% in three weeks. Investors were scared. The Federal Reserve Board took dramatic action by lowering interest rates several times.