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How the Market Works

Bogeyman Economics

Posted by kdadmin on January 15th, 2015.

Lately, it seems that the market is practicing Bogeyman Economics. In other words, if it thinks there could be a bogeyman in the closet, under the bed, or hiding in the basement, then THERE IS a bogeyman.

For any of you who know children, or ever were one, you know how intense these beliefs can be. But I ask you, just how many of those bogeymen ever turned out to be real? Hmm … I’m guessing around zero.

I, myself, have been known to come up with a bogeyman theory every so often. Usually, its about some new food I tried that tastes weird, and is therefore chock full of cyanide or some other deadly poison. Often, my reasoning is as follows, “Just because nobody else in the restaurant has died of cyanide poisoning, doesn’t mean that I won’t be the first.”

But I don’t have to suffer stoically, I can turn lemons into lemonade by describing the experience as a Greek tragedy, much to the entertainment of my dinner companions. Something like, “So and So, whom I’ve never met, somehow has it out for me, so he enlisted the services of Poisonoecles, purveyor all things that can be used to poison food, to help him with his evil plot …” At the end of the evening, my friends have usually egged me on, I’ve gotten past it, and everybody had a good time making fun of the guy with the acerbic wit.

Remember, the market is made up of PEOPLE, each with their own bogeyman complexes. Luckily, there is an easy way to chart the intensity of the market’s fears using the VXX (an ETF that attempts to track market volatility). We’ll use SPY (an ETF that tracks the S&P 500) as our market benchmark. Have a look at the last six months in the chart below and you’ll notice that the market has had several bouts with said Bogeyman (VXX spike), was egged on by its peers (SPY goes down), then got over it (VXX goes down) and came back to its senses (SPY goes up). Of course, past performance is no guarantee of future results. Further, to get some perspective, have a look at my spOILer Alert post from December.

Bogeyman Economics

So, how do you handle this? I say make hay when the sun shines. If you’re prone to market fear based hysteria, by all means watch CNN, or worse, FOX, read about all those ploys on the internet that talk about how low oil is the new fools gold or some other stupid gimmicky thing designed to sell you a paranoid “get off my lawn” kind of newsletter, and really work your fear mongering out of your system. Just don’t trade on this hysteria. Because eventually, when sanity returns and the market lets go of its bogeyman, you’ll prefer that your investments choices were based on macro economics, and not Bogeyman Economics.

For those of you who aren’t prone to fear mongering hysteria, share my blog with your paranoid friends by clicking here. Maybe it will take the edge off.

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