IS THE MARKET RIGHT OR WRONG?

Is the market right or wrong? If the market appears overvalued but continues to rally is the market wrong? Many traders believe the market is trading at the wrong price by being too overvalued or undervalued. It will soon learn the error of its ways, and drop or rise to the "right" level.

There is a problem in assuming that the market is right or wrong. The market does not have to meet margin calls, the market does not have to rationalize what it does, the market does not make or lose money, and the market does not care. The market simply exists for itself. You, on the other hand, have to meet the margin calls and have to rationalize your behavior. The market may be wrong to the trader, but that is because the trader is viewing it from the wrong perspective and not because the market is wrong.

Whenever a trader asks whether something is right or wrong, a moral question is implied. The market cannot be judged in this way because the market does not have to answer to any moral code. It is wrong to ascribe moral concepts to the market, because the idea of right and wrong is uniquely human. The market may have a mind, but this does not imply it possesses a conscience. The market is a natural phenomenon, no different from any other natural process. A natural process, like a snowstorm or a rabbit eating a carrot, is not wrong, and neither is the movement of the market.

There have been many times in history where masses of people have been deluded into believing incorrect things. The consequences have sometimes been disastrous. A market may be overvalued and it may be that investors are totally mad in their perceptions of valuations. The people may be crazy but this does not imply the market is wrong. but only a reflection of the madness of the people. The trader should attempt to understand the dynamics of the market and dispense with a morality as it applies to the movement of the market.

It is pointless to assume whether the market is right or wrong because our ethics are only applicable to humans, and not an entity like the market. It is also futile to assume the market is wrong on a practical basis, because there is nothing we could do about it even if it were wrong. If the market is wrong, can we complain to our elected official, call the police, or take it to court? Can we appeal to its conscience to change the error of its ways?

If the market is never wrong, then what about times when the market was valued at one price and then quickly changed to another price, such as the stock market crash of October 1987? Was the stock market wrong in being overvalued in September and undervalued in November? "Right" and "wrong" assume a morality that the market does not have to follow. The market was neither right nor wrong, but simply was valued at whatever the mass of investors believed it should be. The market is a reflection of the hopes and dreams of its participants, and therefore neither right nor wrong.

Your concern is not whether the market is correct, but whether your analysis of the market is correct. If you felt the market was overvalued and sold in September, and also believed the market was undervalued and bought in November, then your analysis was correct. So you should concentrate on the correctness of your analysis of the market, and not whether the market is right or wrong.