Panic Buying In A Wacky Market

Forget fundamentals, if you’re hoping to trade this market you’d better have a background in psychology!

Like many investors you probably find yourself scratching your head over the irrational moves in the stock market. Just look at this week. The Dow closed down 400 points on Wednesday and then up over 500 points the very next day!

Well, here’s a novel idea. Maybe it’s because the investors trading this irrational market are irrational, themselves.

In fact, you can almost toss out those pesky fundamentals. Many moves have been driven by fear. Investors not only fear losing their money on the downside, they also fear being left behind when the market explodes higher.

What’s going on? For insights we turn to behavioral economist Dan Ariely.

“I think Paulson’s announcement yesterday caused people to realize how little we understand the markets,” explains Ariley. “Not long ago he told us unless we buy toxic assets things will get worse. Then yesterday he said that’s not the right approach.”

”Because of this quick shift people are starting to doubt how much we understand anything that’s happening in the market.” And that leads to feeling of depression.

Ariely goes on to say that those feelings are triggering the sharp moves in the market. “People don’t know what’s coming at them.” And that causes feelings of panic whether the movement is higher or lower.

So until we address these feelings of depression we can’t get out of the crisis, at least according to Ariely.

It’s an interesting thesis. If you’d like to hear our entire conversation with behavioral economist Dan Ariel please watch the video.

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Trader disclosure: On Nov.13, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MSFT), (UUP), (WMT), (DIS), (MGM); Finerman's Firm Owns (MSFT), (UNH); Finermans Firm Owns (OIH) Puts; Finerman's Firm Is Short (IJR), (IYR), (IWM), (MDY), (SPY), (USO), (BBT), (VNO), (COF), (USO); Pete Najarian Owns (AXP) Put Spread; Pete Najarian Owns (CROX) Call Spread; Pete Najarian Owns (FXI) Put Spread; Pete Najarian Owns (LVS) Call Spread; Pete Najarian Owns (MU) Calls

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