(This was originally published on Real Money on 03/06/09 @ 11:32PM EST)
I am reading with interest the comments here on the Real Money Columnist Conversation regarding the psychology of the market now. I think that the tension here is a reflection of the tension among market participants in general.
Traders have been in an increasingly volatile (and stressful) environment since at least February 27th of last year (look up the action on that day) and here is how I see it briefly.
When someone experiences a highly stressful environment for a prolonged period of time many aspects of functioning deteriorate including the congitive (decision making) the behavioral (buying and selling) and the affective (sentiment).
As these areas of functioning veer into the maladptive, participants can get knocked around a lot. This is, in part, why I have been espousing smaller positioning and tighter risk controls for a long time.
The self aware investor here recognizes his/her personal vulnerability.
I will be writing much more about this on my blog over the weekend and will reference it here next week for sure…