Human beings are social creatures. They are driven by basic human emotions such as fear, greed, complacency, etc. Investors are influenced by human emotions often acting in similar ways near market tops (i.e., greed) and market bottoms (i.e., fear).
Investor's behavior or herding is part of human nature, and as such, it is part of investing. It is one of the reasons why many investors are willing to buy at market tops and sell at market bottoms. The reality is investor's psyche tends to overpower rational thinking during extreme market conditions.
So, how can investors better navigate the marketplace and avoid getting caught in the euphoric greed leading to a market peak or the depressive fear ahead of a market trough?
Investor's behavior continues to be a focus of many academic and professional studies/theories to explain the overreaction and regret buyers and sellers often experience when it comes to investing. These studies suggest that underestimating risks is one reason why investors make irrational decisions. Another reason is many tend to focus on the short-term trend when they should be focusing on the longer-term trend. For instance, reacting to the latest breaking news is a sign that investment decisions are driven by emotion rather than sound rational thinking.
There are popular strategies that can take the emotion out of investing. Dollar-cost averaging and portfolio diversification can help with investment decisions and reduce the risk of emotional investing.
However, investing without emotion is easier said than done. While at times active and emotional investing may result in profitable trades, history has shown that following a well-defined disciplined investment/risk management strategy and focusing on the longer-term trends often result in the best performance for most investors.
With the above thoughts in mind, the following charts will focus on the short, intermediate, and long-term technical outlooks of the SPX Index. Remember, the dominant and prevailing intermediate-to-longer term trends tend to override the shorter-term trends.