Monday, August 22, 2011

What is the Future for American Markets?

I've had the question asked of me frequently of late, "Why are the stock markets so volatile?" My simple answer lies in the basic principle of volatility - uncertainty. Uncertainty of a true measure of value. Uncertainty of government. Uncertainty of parallel markets, i.e. European stock markets, commodities markets, etc. However, there is a more important issue to be addressed in volatile markets: the Herd Mentality.

The Herd Mentality is a classic financial phrase attempting to describe the actions of market participants. Market participants often buy and sell securities based on technical speculation. This most often pushes company stock prices lower, while undermining fundamental indicators of company strength or growth potential, i.e. Price to Earnings (P/E) ratios, Earnings Per Share (EPS), Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), etc. When following such trends, investors tend to move as a group (or Herd), pushing stocks below previously held fair values, regardless of financial strength.

What is the future of the American stock markets? This can only be determined by company stock price analysis - the topic of my next blog on or before September 3rd.

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