Price Action Lab Blog

Premium Market Analysis

Economic Analysis, Market Statistics

When Speculators Believe They Are Value Investors

One of the worst side effects of the V-bottom fueled market of 2014 is that many stock market speculators now believe that they are value investors and this disillusioned group includes passive index trackers who have either not learned from the past or simply choose to ignored it.

The S&P 500 just had a 4-day losing streak. That was enough to make headlines. Incredibly enough, a normal even such as a 4-day losing streak did not occur in 2014. The main reasons it did not was due to extreme speculation and greed.


My Winning Streak Indicator above, WSI(4), illustrates this with its value dropping to 0 when there is a losing streak of 4 days. The last 4-day losing streak occurred on December 13, 2013 and there were four such events in that year. But none in 2014, the year of the V-bottoms that were put in place by well-timed interventions near critical support levels.

The seemingly invincible stock market has driven many speculators into the delusional state of believing that they are value investors. But in reality they are reckless speculators. This group includes passive index trackers that have not learned the lessons of 2000 and 2008 and they are risking huge drawdowns in case things go wrong, something that we all hope it will not happen because this economy now depends on the stock market to a large extent.

For example, yesterday the stock market had a correction due to several factors at play, including plummeting oil prices, start of year portfolio restructuring and Euro problems. But the biotech and real estate sectors held well because speculators in that area believe that rates will not rise in 2015:


IBB rose from its open to close down only -0.2% when one would expect this one to be down more than 5% on a day like this. And this sector is also the one that the Fed has specifically warned about being in a bubble state.


IYR is another one that went against the trend yesterday. It is like 2008 never happened and investments in the highly risky real estate sector are booming. The reason for the boom is clear: wishful thinking and greed that as the history of real estate has proved beyond doubt may be replaced by fear and panic.

Passive investors do not only suffer from wishful thinking and reckless behavior, they also are the ones who cause market tops. Passive investing is another Wall Street myth, even worse than random chart patterns like head and shoulders. Yet, unsuspected retail investors buy into these passive investment fables while the promoters of such schemes receive the fees.

2015: The year of active investing? Maybe, we’ll see…

You can subscribe here to notifications of new posts by email.

Disclosure: no relevant positions.
Charting program: Amibroker

Comments are Closed

Theme by Anders Norén