The Market as Mass Mind
I want to remove the sense of mystery from ‘the market’.
We hear the term every day, not once but hundreds of times. The market went up, down, sideways, the market did nothing. It is the chief cliché in financial journalism.
Whenever I hear the term I ask myself, just who or what is this market? Well the answer is plain enough, in the words of the immortal Pogo, ‘We have met the market and he is us’.
The market, any market is a focused mass mind. It is the product of the total opinions of its participants on one topic -- price. The market or to be more precise, the price level of a market traded item, is at any time, the amalgam of all the price decisions made by all market participants.
On one topic, for example, what should the price of the dollar be in yen, the market reflects the will of all its participants, in foreign exchange, its traders. But how do 1,000 or 10,000 individual decisions become a market price? How do we know that the price accurately reflects the wishes of 10,000 people?
If at one instant three market participants want to buy a currency pair and 50 want to sell, the price for that currency will fall. But what actually happens? The three bids in the market are filled, no others enter and the sellers displaying prices react to the lack of bids by dropping their selling prices until lower bids are encountered.
The market is said to have fallen, but the market is not an entity producing a decision. It is only a method for reflecting the decisions of its participants. What occurred is that each participant in the market reacted to the changing information coming from the market, the temporary lack of bids, and their combined reaction is the movement in price. The new price level reflects the aggregate decisions of the traders. It appears to an observer that the ‘market’ traded lower, only because the thousands of individual decisions that comprise the movement are not given separate life, only the mass decision, the price, is represented.
This sense of the decision making power of the market as if it were a living entity is reflected in the terms we use to describe the price action. We often say the market reacted badly to the news or the market took profit today. We personify the market and its behavior.
Of course we all know that there is no creature somewhere beneath the pavement on Wall Street making the decisions for the stock exchange floor. But the common use of this shorthand tends to obscure what is most important point in understanding market psychology. Namely, that the market is a picture of the thoughts of its participants, the market is a snapshot of our minds. The market is us.
Trading is logically simple, though difficult in execution. It is a matter of putting our decisions in line with the majority, with the mass mind of the market, as often as we can.
The market is no place for iconoclasts.
Chief Market Strategist