Reflexivity and New Highs
- Posted by ppearlman
- on March 7th, 2013
A quick note this morning about the new highs in the Dow and Transports.
These levels affect the way people think and there are reflexive aspects around corporate decision making and investor risk appetite especially if prices hold and markets continue higher over the course of the year.
Reflexivity, for those of you who are not familiar, is a concept applied to markets by George Soros, that describes the circular relationship between cause and effect.
Executives at large companies who observe the broad market making new highs and their own stocks doing well will have a tendency to grow more confident in the economy and their own businesses and confidence has been sorely lacking.
This, in turn, might lead them to be more aggressive in conducting business and, importantly, to do more hiring than they might have otherwise. More hiring would positively affect the economy, increasing consumer spending, confidence and the like.
We may also see reflexive investor behavior. The market goes up and people become more attracted to it as they observe others increasing their wealth. This, in turn, leads to more investors getting involved and further increases in equity prices.
These are only two data points in an incredibly complex environment but the potential reflexive aspects of new highs is worthy of mention.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Phil is the executive editor of StockTwits and an investor in the company. He is a partner at Social Leverage, LLC and makes early stage investments in web based companies. (More)