The Freudian Put

We all recall the Greenspan Put.

This was a term coined in the 90’s as market participants came to understand that then Fed chairman Alan Greenspan would lower the Fed funds rate and provide liquidity when the market got hit. It was perceived as downside protection, hence the term ‘put’.

There’s a similar downside protection phenomena at work today in the market that is psychologically based and it has to do with high sentiment reactivity. Essentially, we’re getting elements of sentiment that look like bearish capitulation extremes even on minor pull backs.

Here’s a definition:

The Freudian Put: Downside protection created by high negative reactivity on a market pull back and/or news where some aspects of sentiment move to bearish extremes unusually quickly – aspects that have been historically reserved for larger market bottoms.  

Here’s what I mean by sentiment reactivity. If sentiment is neutral or somewhat positive and the market is rising or stable, a sudden knee jerk and pronounced negative shift in sentiment will occur. Many get very bearish, almost panicy, very fast.

I have alluded to this reactivity previously & recently wrote: we have been conditioned for this and are just waiting for the next shoe to drop as shoes have been dropping left and right for 14 years now.

Even as the market continues to grind higher and make all time highs across multiple indices and sectors, sentiment has remained highly reactive to the downside.

The most recent example of The Freudian Put in effect comes from examining the media/pundit reaction to the most recent pull back. On February 20th the SP 500 fell 19 points (1.25%) and another 9 points on February 21st.

Here’s some prominent examples of market press from February 21st all of which got huge play:

1. GARTMAN: We Are Exiting All Bullish Positions and Rushing to the Sidelines – Gartman’s apocolyptic comments about “tectonic plates” and “earthquakes” got gobbled up like stuffing. via TBI

2. Doug Kass: ‘I’m As Bearish As I’ve Been In Some Time’ – Kass, who usually dances to the beat of his own drummer also seems like he was affected by the Fed minutes and relatively big down day. via WSJ

3. Marc Faber Warns: ‘Market Has Peaked Out’ – The media used to trot out Faber only at market extremes but now he gets play on two days of selling. via CNBC.

Yup, February 21st was a bearish media tsunami off one pull back that is now looking like a blip.

This is sentiment reactivity. This is The Freudian Put.

Now you will know what to look for to see if the Freudian Put remains in effect when the market turns lower for a day or a week or, perhaps, 40 trading days which was the approximate time span of both of 2012’s 2 corrections. Sentiment indicators will gap negative, the media will press fear and your aunt Ika will call you and ask nervously if you should be out of the market.