Adapt to the New Normal

 | Oct 24, 2011 | 1:38 PM EDT
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Since the market bottom in March 2009, it has been surprising how often we have had lopsided, one-sided rallies that don't generate any real enthusiasm. The consistently dour mood, even when the market is acting well, has been the single biggest change in the character of the market that I've seen since I started trading.

The market has always had its ups and down, and plenty of mood swings, but we never see individual investors get excited over a strong market the way we used to before the crash in 2008-2009. The media tries hard to create the illusion that everyone is celebrating when we have big gains, but I don't see it reflected online like we used to. Something major has changed in the atmosphere of the market, and it often doesn't have the feel that it did when folks felt positive and loved the opportunities the market presented.

We have had shifts in both market structure and investor psychology. The structural changes are obvious. Ultra-exchange-traded funds and the growing dominance of computerized and high-frequency trading makes the market act in a different manner. These devices were already changing the market before the crash, but near-zero-interest rates and the huge amount of liquidity created by the Fed has made them even more potent.

The action is now driven from the top down rather than the bottom up. In other words, the focus is on the big picture and strategies that apply to baskets of stocks. There is little joy in the stock-picking game that so many embraced when ETFs and computers didn't determine every move.

The structural changes in the market alone would cause a change in trading action, but emotions and psychology are now very different. It isn't surprising that people don't feel the way they used to; we have gone through the worst economy since the Great Depression. Even if you didn't lose a substantial amount in the market collapse, so many people have been affected by unemployment or the real estate debacle.

Many individuals are still shaken and never regained their confidence, even though the market has acted exceptionally well in the last few years. In fact, rallies are greeted with skepticism and viewed as a function of manipulation simply because so many people can't reconcile their negative views of the economy and world in general with a positive market.

Market players wonder if they will ever experience a "normal" market again. I don't think it will ever feel the way it did five or 10 years ago, but if we stick with it, we will eventually adapt to the "new normal."

The market has evolved -- and not necessarily in a good way. As long as we are willing to adapt with it we can deal with it, but it will require awareness and hard work.

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