Emotional Investing in a Central Bank World

Pinnacle Digest writes: Central banks have taken over our economy with QE3 and the like.  Unlike 2009, when the first liquidity injection took place and when markets were near multi-decade lows, many US markets are now at near 4 year highs.

Bob Hoye quotes the ECB -

"No one will speculate against the unlimited power of a central bank. This is what stabilizes currencies of countries where investors know that. One wouldn't gamble against the Federal Reserve, for example."
– European Central Bank Governing Council, Bloomberg, September 13

Hoye explains that there are times when market prospects can be downright daunting - like now. The emotional side of investing can be compared to standing at the top of a Double Diamond ski run, or in a whitewater kayak going into a rapid that is a grade more severe than your comfort level. Another analogy is driving a sports car at the end of a long straight and going into a hair-pin turn. A big adrenalin rush goes with trying to brake later than the other guy.

This is the feeling investors have as they wait for the markets to decide if they are about to stall.

Hoye reminds us that, typically over hundreds of years, if something bad is going to happen in the markets it will happen in the fall. Recent market action has given investors reason to be concerned it may head south, soon. There is now reason to believe that the Fed intervention can boost the markets, but it may not have a lasting impact.

Base metal prices (GYX) have recorded the sharpest rally in a decade on the back of QE3. Similar behaviour for these metals occurred in early 2008.  

In regards to crude oil, tuesday's 4-dollar drop in 30 minutes was alarming. Crude often rushes up and then suffers a sharp hit on the way to an intermediate decline.

Hoye believes that when it comes to commodities, the summer's surge has been exhausted and a period of correction is needed. Explaining that, "this is part of the overall rise, with the Fed and the ECB accelerating it to a compulsion that is measurable."

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