One has to ask the following question. Why does the crowd always panic when the market starts to pull back? Why don’t they panic when the market is trading at lofty levels, and euphoric is running high? The answer has to do with something called the secret desire to lose syndrome. You can discover more on this by heading over to our mass psychology section
While many will look at the chart below and prepare for the worst, we feel that they should be looking at the chart and preparing for the best. One thing stands out very clearly, every time VIX has spiked upwards, the markets have almost always bottomed shortly after that. Extreme spikes have almost always correlated to selling climaxes in the market. What is a selling climax? A selling climax is when the masses panic and dump the baby out with the bathwater. In other words, they panic and sell everything as they think that the markets can and will only head lower; this is precisely when the markets reverse. This is the perfect action at precisely the wrong time.
The above chart indicates that over the long run the VIX tends to trend in the 12-18 ranges. While it is hard to think straight when panic is in the air, this is precisely when you should force yourself not to react and give into panic. When fear governs a person’s actions, the outcome is nearly always unpleasant. When market volatility run high as is the case right now, it is best to tighten one’s stop. Yes, it’s not the best feeling to be stopped out, but it is far easier to recoup from small losses than from major ones. Another way to look at it is that if you are stopped out and you liked the stock, you have a good chance at getting in again at even better price.
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Long Term Stock Market Bears Always Lose (July 27)