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Investor Psychology is Key

| February 14, 2023

We’ve discussed investor psychology in the past and it seems like a good time to look at those indicators now.

But first, I guess we have to give a shout out to all the Chiefs fans. It was a good game and they did what they had to do to win. Take a look at how much was wagered on the Super Bowl.


$1.1 billion in 2022, compared to $486 million in 2021…but according to some reports, 2023 topped $16 billion. Now there’s an industry in growth mode. I can tell you, I wasn’t in on that “fun.” If your bet paid off, good for you.

Let’s get back to the psychology of the markets.  One of the best ways is looking at individual investor sentiment.

We are almost to the ‘fearful’ stage. Remember, we need to channel our inner Buffett with these indicators. Be greedy when others are fearful, and fearful when others are greedy. This gauge is telling us to start being a bit fearful.

This is saying something similar. Market participants are greedy, so we should start thinking about being fearful (though cautious might be a better word).

Also, let’s take a look at the smart money/dumb money index. You can see that the “dumb” money is all in on this market. Might they be correct? Maybe, but check out the other times they have been overconfident.

Don’t get us wrong, we think if you look out a year, the markets will look very different than they do today. The big question is where does it go between now and a year from now? We will find out.

Of course, this is all predicated on the inflation number that comes out tomorrow. Employment has been running hot, with a jobs report that was unbelievable, pushing the unemployment rate down to 3.4% (see chart below).

Remember, if the FED wants to get down inflation, they are taking aim at jobs, because if fewer people have jobs, they can’t spend as much on stuff. If less stuff is bought, then theoretically prices should come down. That’s the FED reasoning. We know that some prices are coming down fast, others not as fast. The market seems to think inflation will come down fast enough so that the FED can ‘pivot’ and start cutting interest rates.

So far, the FED has been clear that they will not be cutting interest rates and may leave them higher for longer. If the market starts to believe that narrative again, you will likely see the markets correct.

If we look at Dr. Copper, it is saying the markets are expecting a rebound in trade and activity. Take a look at the chart below. You can see copper prices are up substantially from the lows in July.

Lastly, the 2-year treasury is closing in on its highs from last year. Since the jobs report earlier this month, it has been on a tear. Either the bond market is right, or the stock market is right. Usually, the bond market is correct.

Let’s see how the CPI data comes out when it’s published tomorrow. That will tell us which way we’re going. Just remember to not make the CPI a topic of conversation at your Valentine’s Day dinner. That’s really a reminder to myself, but I’ll share it with you just in case it’s helpful!

I hope you have a good week. If you have any questions or want to talk through something, let’s schedule a time.