11-2-09

Fear Factor

How does fear control your daily actions?

Take a look at your life and the choices you're making that determine what happens in it and you'll notice that your fear of things- real or imaginary- is basically how you make decisions.

Fear is an emotion programmed into us for basic survival reasons; it served a crucial function in the 40,000 years of human evolution (don't forget that most of us have really only been relatively safe from mortal danger in the last couple of hundred years).

Ancient people needed a way to learn about the world around them- what was safe and what wasn't. Basic stuff, like you can't walk off a cliff and that impaling yourself onto a sharp object will seriously harm you.

In short, fear is a good thing in certain situations.

The trouble is, in a world where we know that walking off a cliff won't kill you, we still have this legacy of the fear emotion...

It kept us alive when we were cavemen, but in a complex world like ours, it actually secretly works against us. Left unchecked, fear evolves into anger and anger evolves into harm to others.

Being frightened of something happening instantly gives us an Achilles Heel. That makes us open to manipulation if an aggressor knows about our weakness.

Aggressors want something from you by their very nature. They will instinctively put a fear in your mind that plays on your weakness and get what they want from you this way.

Essentially, we are still animals. When animals smell fear, they attack.

Employers do it to keep you productive, loyal and trouble-free. The media does it to make money from you- the latest 'scare' gets your attention. Governments do it to make you vote for them. Salespeople do it to make you buy (insurance is the classic example). Other people do it to you for any reason that suits them to get what they want from you.

Fearless people thus have the upper hand.

By changing fear into fearlessness, you become instantly powerful.

Have you noticed how peoples' fortune tends to go in cycles? There are times when you're on top of the world from your successes... and then seemingly from out of the blue, you lose it all. Hence the expression: 'Pride comes before a fall.'

Sound familiar?

This isn't an accident, and it's not the gods playing games. It's because of your fear...

You see, when everything is going well, we get conservative. Once we've accumulated wealth or power, we start to worry about losing it. In short, we become frightened.

Somehow, life has a way of smelling that fear and it comes at us. One thing I learned in the playground at a tough all-boys school was that the kid who doesn't want a fight is the one who walks away with a black eye.

Some of the most powerful people in history for good or evil, demonstrated this trait of fearlessness.

So you can be ruled by fear or you can use fear to your advantage.

Is there a way we can translate this into making money from markets? Yes... a very specific way, using a tool that actually measures the level of fear in markets and we can use this tool to capitalize on what I just explained about how peoples' fear moves in cycles. Remember, the stock market is just a reflection of peoples' fears ultimately.

For about a year now, I've stood firm over a solid bet:

That the crash would turn into a large bounce, that Dow 10,000 would be breached before it turned south again in a big way.

So far, it's playing out to the letter, but if you want to trade this market and aren't out of the water yet (as I've been advising), we still have a timing question; WHEN will the next part of this tired sequence of events move on to the final act? WHEN will the next, final drop come?

The answer I think is safely within the next year to two years, but that's a long time frame. We need to try and be more exact.

We're looking for a spark to set this whole thing on fire again, and they're flying from various directions...

The commercial property market is the next shoe to drop as I've been saying repeatedly here. There's even a way to profit by this by buying the ETF called 'SRS'.

The other big factor that most people are missing is that American consumers simply aren't showing up to this party Obama is throwing. In fact, they're starting to wonder who the heck they voted for- this guy is an outright socialist. The market is partying on simply because results aren't as bad as expected, but soon reality will kick in just as it did in the dot-com bubble.

Absolutely the ONLY thing I see sending this market much higher apart from a brief extension of this rally, is hyper-inflation and the Fed simply hasn't printed enough money to achieve that (yet). And you can't fix a debt crisis with more debt, you silly people, you.

So the fundamentals are all there for a serious market correction, some say, to wipe-out levels that would take many years to recover from. BUT, these fundamentals have been in place for several months now and people betting against this market have been absolutely killed!

Logic says this market should be in the toilet. Emotion says different (see how markets are driven by emotions?).

The market always does what it's supposed to... but never WHEN!

So what's a player to do?

We measure the 'fear factor' in this market...

http://finance.yahoo.com/q?s=%5Evix

Click on the above link and you'll see a measurement of fear on the market called the 'VIX'. (If you're interested, what it's actually measuring is how much downside protection options traders are buying).

As I write, it's around 24. It has a 52 week range of about 11-80. If the vix is high, it means people are scared and if it's low it means people are the opposite. Remember what I said about the fear cycle?

Now, you may well have seen the fools on CNBC talking about the vix lately BUT, they're totally misinterpreting what it means! They're seeing a low fear factor as a bullish sign, when history says it's exactly the opposite!

Using the vix, contrarians have a red light/green light system.

At early twenties, complacency is in and a fall is due very soon. If it gets below twenty, it's serious shorting the market time. The vix was last at 11 at the height of the boom in 2007. Can you see those days returning anytime soon?

Keep an eye on this and act accordingly.

Use fear to your advantage, not as a weapon that can be used against you.

Until next time.

Mark Patricks

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