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Financial Psychiatrist: Panic Means Opportunity

Our market participants need to understand this today. This is Market Psychiatry 101. People will sell in panic and in a week or less will be overtaken with regret. Also, those who are trying to pick a bottom will be hurt. The point is that the markets are constructed in such a way as to separate the most money from the most people. They are constructed to inflict the most pain on the most people. Every successful trader and investor knows this. This is why so many fail (over 90% of new traders blow out their accounts in the first year!). This is, in large part due to their inability to understand the psychology of the markets which is no more than their own psychology.

Please review the Investor Sentiment Cycle that we have discussed so many times.

We are nearing levels 10 and 11 in the diagram below. The market is behaving like a crybaby who is now asking for a Fed rate cut ( despite the fact that it will do little to help this crisis since there already has been a stealth cut … but that is for another day).

Several signals that I follow are giving buy signals on the DJIA and are close to buy signals on the S&P 500.

This is not the time to panic out of everything. When others are panicking, we are looking for opportunity.

Wait for the next rally to get rid of all underperforming assets. Pressing the short side here is not advised.

However, nothing goes straight down or straight up.

We don’t have an all-clear signal yet, but this looks as much like capitulation as I have seen in some time.

Stay the course and don’t panic. I am not calling a bottom, since I listened long ago to the great John Bollinger who said that there is one chance in a lifetime to call an exact bottom or top. I am, rather, saying that now is NOT the time to panic. Stay steady and look for opportunity.

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Janice Dorn, M.D., Ph.D., is a financial psychiatrist and chief global risk strategist for Ingenieux Wealth Management in Sydney, Australia. She also offer trading consulting and coaching services via her Web site, TheTradingDoctor.com.