Inside the Market Psychology Cycle: Unveiling Trends and Tactics

Market Psychology Cycle: The Key To Successful Investing

The greatest ignorance is to reject something you know nothing about

Derek Bok Quotes

Mindset Mastery: Cracking the Market Psychology Cycle

Updated Aug 2023

We intend to present this argument against the backdrop of history, as those who fail to learn from history are destined to repeat it. This approach also emphasizes how the concept of mass psychology withstands the test of time and underscores why we wholeheartedly embrace it at the Tactical Investor.

Contrarians only take a position that is contrary to the masses, and that wraps up the ideology of being a contrarian, well as far as most contrarians go today. Very few of today’s contrarians are true contrarians; they fall under the category of fashion contrarians.

Investors that adopt the doctrine of mass psychology correctly look for something more. Mass psychology takes the principle of contrarian investing and then pushes it to the next level.  Students of Mass Psychology look for extreme type situations. In other words, sentiment should not just be bullish before an opposing strategy is put into play; it should be at the boiling point. Only then will the student of mass psychology look for an exit and attempt to take an opposing position to that of the masses. To illustrate this point, we will use the following example.

Shining Opportunities: Exploring Commodities and Gold

The commodities sector has several components, two of which are Gold and Silver. Throughout 2002 and early 2003, the hate and disgust for both these areas were extremely high. Fast forward to 2004, and Gold was being mentioned everywhere; even CNBC had a little Gold ticker that stated the price of Gold throughout the day. The hate or disgust for both these sectors was no longer there. Even though they have a long way to go before the masses fully embrace them, they did not provide a psychological basis for taking an opposing position to that of the masses in  2004.

Gold continued to soar to untold heights that most would have deemed impossible in 2003. All along the way, we continually stated that Gold would continue to trade higher and higher until 2011. Here are two of many articles that highlight this viewpoint article 1 and Article 2.  We also warned our subscribers to bail out of Gold very close to the top.

Mindset Clash: Market Psychology Cycle vs the Mass Mind

Even though the masses have not fully embraced Gold, this concept does not matter in the long run. A more critical criterion would be to find out what % of investors have taken positions in these sectors or not. Next, one would try to find out what the Gold bugs (the most bullish individuals ever created on earth) are doing. If all the Gold bugs are bullish, then based on the contrarian rules of investing, you should take a contrary to a neutral position because all the individuals in your group are now bullish.

An essential criterion to remember in terms of precious metals is whether one should care what the masses are doing that much or focus on the Gold bugs (the group) that care about Gold with passion.  The masses, in general, will not embrace Gold fully until it becomes fashionable, and by then, a significant portion of the Bull Run will be a thing of the past. In the last Gold Bull Run, the masses did not even know what was happening, let alone take a position in this sector. So one measure would be to determine if all the people who believe in Gold have already taken classes. If they have, then the market has become saturated.

Beyond the Peak: Analyzing Gold’s Ability to Reach New Heights

The only way it can continue its upward run is for momentum players to jump on the bandwagon.  These players have very short periods of concentration, and thus, they jump in and out very fast. The corrective phase could be excruciating once they decide to bail out, as precious metals topped out in 2011.  The housing collapse and internet bubble are stark reminders of what happens once momentum has run its course.

Mass psychology is the constant analysis of the playing field to determine how the game is being played. Are the rules changing, and are the players becoming more aggressive or docile? Is the playing field soft, rocky or worse, on the extraordinarily high and treacherous ground?  One has to take measures at different levels and then compare them to the pattern you have established from past observations.  In this sense, mass psychology is dynamic compared to most contrarians‘ methodology.


Investing Transformed: Unveiling the Market Psychology Cycle

Contrarians do not evaluate their position solely concerning other contrarians; instead, they assess their strategy based on the sentiments and actions of the masses. This approach allows them to understand the market dynamics comprehensively and avoid missing out on crucial information.

This usually results in pain, misery and taking on substantial losses.  Look at the Gold bugs. They moved from the Euphoric phase, the having found religion phase, to the gnashing of teeth and pure misery phase as they watched Gold plunge from the 1800 range down to the 1000 range.  They still cannot fathom why this happened, especially because trillions of more dollars have been created since 2011.

The Internet boom lasted a year longer after all the Technical Analysis (TA) and contrarian indicators were in the highly bearish zones. Euphoria for this sector was running sky-high, and if one had simply used contrarian indicators and shorted the market, one would have been blown out of the water into the frying pan and roasted alive.

Failing to bank Profits is a sin.

The same holds for the Gold bugs; instead of banking some profits, they continued to plough more money into Gold, and as it pulled back, they jumped for joy and added even more. Once the correction moved from the mild to the wild phase, they panicked and started to pray. Today the sentiment is almost as bearish as it was in 2003. So a great buying opportunity is at hand.

Mass psychology involves work, while contrarian investing involves very little; besides taking a position opposite to the masses, minimal effort is needed. We now speak of the most significant class of contrarians (fashion contrarians). Therefore most pure contrarians were caught flat-footed when the Equity markets mounted this massive rally from Oct 2004. Their contrarian indicators suggested shorting the market or taking a neutral position was the right thing to do.

Unlocking Market Dynamics: Decoding the Psychology Cycle

No matter what people do, only 10% of the investors can win anytime. The moment the crowd starts winning, no matter what side of the fence they are on, contrarian or the masses, the markets will adjust to bring this ratio back to its norm.

This is a vast subject, and we could write pages on it; we have, so please enter the search term “contrarian or mass psychology in the top right corner of the page to find more articles on this topic.

Most contrarians are fashion contrarians; in that aspect, they are no different from the masses. They embrace a position because it appears fashionable and panic when something goes wrong.  All you need to remember is when the masses are euphoric, it’s time to panic and vice versa.

The Psychology Puzzle: Exploring Inductive Thinking in Action

Investing based on psychology amounts to taking a position against the masses but against the actual fashion contrarians once sentiment has reached the boiling point, or at the very least, taking a neutral position. Less attention is being paid to the Gold and Silver sectors, and both are becoming suitable investments from a contrarian and a Mass Psychology perspective.  Mass Psychology and Inductive thinking are related; more on this topic here. Inductive vs Deductive reasoning- for investing in the markets

Gold Bugs in Disarray: Navigating the Aftermath of Shock

As the price of Gold approaches the 1100 mark, many Gold enthusiasts are feeling disheartened and abandoned. They are witnessing the apparent failure of their hopes and prayers as Gold continues to face downward pressure, despite the ongoing printing of trillions of dollars. This disparity between expectations and reality is causing despair among the Gold bugs.

In this situation, it is important to recognize the coexistence of two worlds: the illusory and the real. The majority of people have embraced the imaginary world, where money seems to appear without much effort magically. This belief allows central banks like the Federal Reserve to continue printing money while the masses remain unaware of the consequences. The Gold bugs struggle to understand this dynamic and the prevailing illusion that undermines the value of Gold.  Market Update July 31, 2015

Gold stocks have experienced significant declines, leading to an atmosphere of panic and uncertainty. This situation presents an opportunity for savvy investors to increase their positions gradually. We have utilized the profits from our previous exit from Gold to initiate new positions. However, we are waiting for a strong buy signal from our Trend indicator before committing additional funds.


Do or be done in…… Sol Palha


FAQ on Market Psychology Cycle

Q: What is the ideology of being a contrarian?

A: Contrarians take a position contrary to the masses, challenging popular beliefs or trends. However, in today’s context, most contrarians are fashion contrarians who adopt positions based on what appears fashionable rather than truly opposing the majority.

Q: How does mass psychology differ from contrarian investing?

A: Mass psychology takes the principle of contrarian investing to the next level. It involves seeking extreme situations where sentiment is not just bullish but at its boiling point. Only then does a student of mass psychology consider taking an opposing position to that of the masses.

Q: Can you provide an example illustrating mass psychology and contrarian investing?

A: Let’s consider the commodities sector, notably Gold and Silver. In 2002 and early 2003, there was widespread hate and disgust towards these areas. However, by 2004, Gold gained significant attention, even becoming a topic on CNBC. This shift in sentiment no longer provided a psychological basis for contrarians to take an opposing position.

Q: How does mass psychology relate to precious metals and Gold?

A: Regarding precious metals like Gold, the focus should not solely be on what the masses are doing but rather on the passionate Gold bugs who deeply care about Gold. The masses typically embrace Gold only when it becomes fashionable; by then, a significant portion of the Bull Run may already be over.

Q: Can Gold trend to new highs despite market sentiment?

A: For Gold to continue its upward run, momentum players need to join the bandwagon. However, these players tend to have short periods of concentration and can quickly exit the market. Once they start selling, the corrective phase could be painful, as seen in the housing collapse and internet bubble after momentum had run its course.

Q: What is the role of mass psychology in analyzing the market?

A: Mass psychology involves constantly analysing how the game is being played in the market. It requires assessing whether the rules are changing, if players are becoming more aggressive or docile, and the nature of the playing field. By comparing these factors to past observations, one can gain a dynamic understanding of market psychology.

Q: What are the pitfalls of contrarian investing?

A: Contrarians often make the mistake of measuring their position relative to the masses and neglecting the positions of other contrarians. This oversight can lead to significant losses and missed opportunities. For example, during the internet boom, contrarian indicators and technical analysis may have suggested shorting the market, but those who did so suffered significant losses.

Q: How does the market psychology cycle affect investors?

A: Regardless of whether investors are contrarians or part of the masses, only a tiny percentage can win at any given time. When the crowd starts winning, the market adjusts to return the winning ratio to its norm. Understanding the market psychology cycle is crucial for investors to navigate these dynamics.

Q: What is the relationship between mass psychology and inductive thinking?

A: Investing based on psychology involves taking a position against the masses or fashion contrarians once sentiment has reached a boiling point. It also requires considering inductive thinking, which consists in drawing general conclusions from specific observations. Mass psychology and inductive thinking are interconnected in the context of market investing.

Q: How does sentiment affect Gold and the Gold bugs?

A: As sentiment towards Gold fluctuates, Gold bugs experience shifts in their emotions and beliefs. When sentiment is high, Gold bugs may be euphoric and confident. However, during periods of decline, they may feel despair and confusion. Sentiment can impact the behaviour and decision-making of Gold bugs.

Q: What is the current outlook for Gold stocks?

A: Gold stocks have experienced significant declines, leading to market bloodshed. Astute investors may consider slowly adding to their positions during this time. It’s important to note that we used the profits we locked in when we exited Gold to open new positions. However, we await a significant buy signal from our Trend indicator before making large-scale investments.

Q: How does mass psychology require more effort compared to contrarian investing?

A: Contrarian investing typically involves taking a position opposite to the masses with minimal effort. On the other hand, mass psychology requires continuous analysis and observation of market dynamics. It consists of monitoring changes in sentiment, assessing players’ behaviour, and comparing these factors to past patterns. Mass psychology demands a more active and involved approach to investing.

Q: What is the significance of banking profits in investing?

A: Failing to bank profits can result in significant losses. It is essential to take profits along the way and not become overly attached to a specific investment. For example, Gold bugs which did not secure their profits and continued to invest more money in Gold, experienced even more significant losses when the correction occurred. It is essential to practice disciplined profit-taking strategies.

Q: How does the illusion of the market affect investors?

A: Two worlds coexist in the market—the imaginary and real worlds. Many people embrace the illusory world, which may supersede reality for a time. Gold bugs often fail to grasp this concept. The masses, driven by the illusion, may believe money is created effortlessly while the reality of hard work and labour is overshadowed. Understanding this dynamic is crucial for navigating the market effectively.

Q: Are additional resources available to learn about contrarian investing and mass psychology?

A: Yes, there are numerous articles available on these topics. To find more in-depth information, you can enter the search term “contrarian” or “mass psychology” in the top right corner of the page to explore a variety of articles on these subjects. Further research and study can provide a deeper understanding of these investment approaches.

Originally published in Aug 2015, this article has remained a work in progress, consistently updated to reflect the latest information. The most recent update was performed in August 2023.

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