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Markets awash in fear? Time to bring in the shrink

Well, so much for any letup in the panic attacks that roiled global equity, commodity and currency markets last month. After one of the worst Mays in nearly half a century, it's plain that jittery investors remain ready to rush for the exits at the merest hint of more trouble in euro-debt land, weaker than expected economic indicators or the sounds of sabres rattling in far-flung corners of the world.

Such was the case on Friday, when markets around the globe were bathed in red.

The culprits identified by market watchers: a less than stellar U.S. payroll report; fresh fears of a debt default in Europe, this time courtesy of Hungary; and rumours of derivatives trading losses at troubled French bank Société Générale. Hungary's helpful political overseers kicked things off when a spokesman for new Prime Minister Viktor Orban told reporters the previous government had lied about the dreadful condition of the economy - how shocking! - and did not dismiss the possibility of a default.

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Now this isn't the first time the markets have faced idiotic comments from self-serving politicians in economic backwaters, rumours of more bank screw-ups or less than upbeat economic data (where's that V-shaped recovery when you need it?). But after running for some time on a mixture of noise, numbers and fear, they are becoming more easily spooked than ever.

Technical analysts say a new turn toward bear territory is in the charts, as we have run smack into a dreaded "death cross" in some equity markets, including Britain and France. Even Brazil, with its robust growth prospects, has apparently slid into the icy grip of the death cross. Which occurs, according to ever helpful, when the short-term moving stock average crosses below the longer-term 200-day line.

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At this point, I think it's high time to consult not one of those estimable chart-loving technicians but a practising psychiatrist who can tell us a thing or two about human behaviour under stress. Which brings me to Richard Peterson, the only working shrink I know who also manages other people's money.

The markets are indeed awash in fear, says Dr. Peterson, a managing partner of MarketPsych in Santa Monica, Calif. Its motto: "Where mind meets money."

The fundamental issues underlying that fear are perhaps not things that can be easily addressed, says the good doctor, who notes the "diminishing confidence" of people in the ability of governments and market watchdogs to fix things.

"Some of it has to do with the flash crash [in May] the fact that there appears to be this immense instability that is frightening many equity investors, especially the mom and pop investors. I think there's less trust in the markets than there used to be," says Dr. Peterson, who toils as a forensic consultant in criminal cases when he's not analyzing market behaviour for fun and profit.

Besides running a fund, Dr. Peterson's firm trains advisers, traders and other finance pros in the nuances of behavioural finance and what it calls "emotion management." These days, the markets need plenty of the latter.

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"A lot of people are going to be disillusioned with the market over the next couple of years and throwing in the towel, if they haven't already. I think we could be in for a long period … where people don't really see what the point of investing is any more; when it just seems like a casino and it's rigged against them."

How does this perpetual state of unease affect the good doctor's own investing strategy? "Actually, it's really quite good for us. We buy a lot [of undervalued stocks] We love panic … strictly for the [hedge]fund's sake."

MarketPsych's fund specializes in short-term trading, with an average holding period of about a week, so it jumps in and out of a lot of stocks. "We buy things where people are panicking," Dr, Peterson says. "We also sell things where they've overextended themselves, and people start to doubt whether they should hold them or not."

One of his firm's fear-gauging techniques involves the use of software to analyze language used by people online on message boards and in blogs, as well as executive interviews and other sources to determine which securities may be most fragile.

The author of a 2007 book called Inside the Investor's Brain sketches what appears to be a serious case of depression, and not of the economic kind. Yet this actually makes him bullish about the long-term market outlook.

"There's so much pessimism and so much mistrust. That's generally a good thing. But I think there are still a lot of optimistic buy-and-hold investors who need to be washed out. People really have to swear off this market before we can get a good rally."

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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