• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Financial Services

The Evolution of Fear and Greed

The role of the two key emotions in market action is changing.
By JAMES "REV SHARK" DEPORRE
Sep 09, 2017 | 10:00 AM EDT

In recent years the biggest change in the market has been how the emotions of fear and greed function to affect price action. Those two emotions have always been at the heart of market movement and understanding how they work is what allows astute traders to produce exceptional returns.

For many years professional investors feasted on the emotional overreactions that were created by individual investors. They often went so far as to refer to these emotional amateurs as 'dumb money.' Acting contrary to the emotional wisdom of the unwashed masses produced great opportunities.

Fear and greed are still the foundation of market movement but the role they play has changed dramatically.

The nature of markets is to figure out what trading advantages and pricing inefficiencies exist. Traders gravitate toward the trades that exploit those opportunities and eventually there will be enough traders doing the same thing to wipe out the advantage that existed.

A good example of this is the well-known 'sell the news' tendency. When good news is anticipated, traders buy in anticipation so when the news actual does occur there is no one left to buy. The more the news is anticipated the quicker it is priced in and the fast any trading advantage is eliminated.

Over the past decade or so this thinking has been applied on a huge scale to deal with emotional reactions in the market. The programmers are aware of the tendency for there to be panic when there is bad news and they are also aware of the tendency toward overreaction. To exploit this they have designed computer programs that will automatically buy into weakness when it occurs.

Everyone in the market is now aware of this tendency toward buying dips. It doesn't matter what the news might be. We know the programs are going to eventualy kick in and the bounce will occur. Traders help to make it self-fulfilling because it has worked so well for so long.

One of the consequences of this is that the dips are shallower and much shorter lived. This market has not had a notable correction in a very long time because of this phenomena. Volatility has fallen to record lows because of the way that the programmers have tried to take advantage of movement caused by fear and greed.

This has confounded many market pundits who continue to think that fundamental factors will impact the emotions of investors and cause movement. That correlation is broken. Fundamental factors may trigger emotions but traders totally discount those emotions immediately. So when we have talk about North Korea developing nuclear bombs, the fear is immediately discounted.

The efficient market thesis stated that news is always immediately discounted so there is no advantage to trading. That has been proven incorrect in many ways but what is making trading more challenging now is that emotions are now being discounted even more efficiently. It is the emotions that have always given traders an advantage but now they are much more difficult to navigate.

Eventually this market is going to surprise the computer algorithms with a reaction that is not anticipated. When that occurs, it will create a cascade of reactions and provide some significant market drama. No one can predict when that will occur, but that is how markets always evolve. The efficient market makes a mistake and everything changes.

Fear and greed will never disappear but the way the market deals with them has evolved. Understand that and you will understand this market.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Rev Shark had no positions in any securities mentioned.

TAGS: Investing | U.S. Equity | Financial Services | Stocks

More from Financial Services

Weathering the Storm With a Safe 4.5% Dividend Yield

Bob Ciura
Jan 27, 2021 2:28 PM EST

This regional financial name is appealing choice for income investors.

3M and Mastercard Continue to Trade Sideways

Bruce Kamich
Jan 20, 2021 10:55 AM EST

Both stocks may eventually do better when investors sense that the economy is indeed going to do better.

Here's Why You Should Keep an Eye on Upstart Holdings

Bruce Kamich
Jan 19, 2021 11:48 AM EST

Keep this newly public company on your shopping list for the first quarter of 2021.

One to Watch: A Strategy for PagSeguro Digital

Timothy Collins
Jan 14, 2021 2:55 PM EST

Here's where I'd look to be a buyer of the stock. On the options side, the market is a little on the thin side, but it is playable.

Why I'm Souring on Lemonade

Bruce Kamich
Jan 13, 2021 2:01 PM EST

LMND shares have tripled in less than two months

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:48 AM EST STEPHEN GUILFOYLE

    Cashing in Some More Chips at Stocks Under $10

    We're trimming a position for a big gain today.
  • 08:34 AM EST GARY BERMAN

    Wednesday Morning Fibocall for 1/27/2021

    The "correction" can be coming sooner than we thou...
  • 09:35 AM EST CHRIS VERSACE

    Another Big Winner for Stocks Under $10

    We're ringing the register Tuesday morning.
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login