When Psychology Changes, News Changes

Elliotwave blog has a story about how when psychology changes, news changes: When Psychology Changes, News Changes

When collective psychology changes, coverage of the news changes with it.

I realize how that statement can be understood in at least two ways, so let’s get specific. Am I talking about “changes” in

a) how news will be covered, or
b) the version of news that has been covered already?

My answer is: Both. Which is to say, psychology can and often does change everything. In the case of changing the version of news that has been covered already, the most obvious recent example is the Federal Reserve’s bailout of Bear Stearns, which was engineered during the weekend of March 15-16.

You may remember some of the particulars from the news at that time — the sense of fear was palpable, as print and broadcast media were full of stories that speculated about which big bank “might fail next” and “how much worse this will get.” Bear Stearns was so reckless in its subprime lending that bankruptcy was at hand, and the firm’s chairman was away at a bridge tournament when the crisis turned critical; J.P. Morgan had agreed to the “buyout” of Bear for $2 per share, and was widely lauded both for helping the economy at a critical moment and negotiating a good deal for itself; the Fed was even more widely lauded for “doing what it had to do” to “restore confidence” in the markets and “avoid a sudden market-shaking crash.”

Stubborn traders who are highly leveraged but on the right side of the fundamentals sometimes get burned trying to fight the short term reversal of the market sentiment/psychology. Traders should always give themselves enough time to safeguard themselves against short term market reversals.