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WHAT IS STOCK PRICE, MASS PSYCHOLOGY
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Wall Street is named after a wall that kept farm animals from wandering away from the settlement at the tip of Manhattan. The farming legacy lives on in the language of traders. Four animals are mentioned especially often on Wall Street: bulls and bears, hogs and sheep. Traders say: "Bulls make money, bears make money, but hogs get slaughtered."

A bull fights by striking up with his horns. A bull is a buyer—a person who bets on a rally and profits from a rise in prices. A bear fights by striking down with his paws. A bear is a seller—a person who bets on a decline and profits from a fall in prices.

Hogs are greedy. They get slaughtered when they trade to satisfy their greed. Some hogs buy or sell positions that are too large for them and get destroyed by a small adverse move. Other hogs overstay their positions — they keep waiting for profits to get bigger even after the trend reverses. Sheep are passive and fearful followers of trends, tips, and gurus. They sometimes put on a bull's horns or a bearskin and try to swagger. You recognize them by their pitiful bleating when the market becomes volatile.

Whenever the market is open, bulls are buying, bears are selling, hogs and sheep get trampled underfoot, and the undecided traders wait on the sidelines. Quote machines all over the world show a steady stream of quotes — the latest prices for any trading vehicle. Thousands of eyes are focused on each price quote as people make trading decisions.

Arguing About Price

When I ask traders at a seminar, "What is price?" some answer, "Price is a perceived value." Others say, "Price is what a person at one particular point in time is willing to pay another person for a commodity." Someone says, "Price is what the last person paid for it. That's the price right now." Another suggests, "No, it's what the next person will pay."

Traders who cannot give a clear definition of price do not know what they are analyzing. Your success or failure as a trader depends on handling prices —and you had better know what they mean! Some attendees at the seminars I give become agitated as they search for an answer to a seemingly obvious question. Arguments fly back and forth, as in this discussion:

I'll give you the worst-case example. In the 1929 crash, Singer stock was selling for $100 and all of sudden there's no bid, no bid, no bid, and somebody comes forth — "I gotta sell, what am I bid?" and one of the floor clerks said "one dollar" and he got it. He got the stock.

Price is what the greater fool is ready to pay.

Take the '87 market. All of that 500-point decline — stocks weren't worth any less after the decline than before. So it was the difference in the perception and the willingness of the next person to pay for it.

You might carry that one step further. What you're paying for is absolutely worthless. It is just a piece of paper. The only value that it does have is the intrinsic dividend value, compared to government paper at that time.

It still has the value of whatever anybody will pay you. If no one wants to pay you for it, it has no value.

It'll pay you for a yield.

What if you trade soybeans? You can eat them.

How about a stock that has no yield?

But doesn't it have assets?

The company that issued the stock has value, cash flow.

I give you one share of IBM; if no one wants to buy it, you can light a cigarette with it.

There is no such thing that no one wants to buy IBM. There is always a bid and an ask.

Take a look at United Airlines. One day the paper says it's $300 and the next day it's $150.

There's no change in the airline, they're still making the same cash flow, they've still got the same book value, and the same assets—what's the difference?

The price of stock has very little to do with the company it represents. The price of IBM stock has very little to do with IBM. As I visualize it, the price of stock is connected by a mile-long rubber band to IBM and it can be wildly higher and wildly lower — IBM just keeps chugging along and it's a very, very remote connection.

Price is the intersection of supply and demand curves.

Each serious trader must know the meaning of price. You need to know what you analyze before you go out and start buying and selling stocks, futures, or options.

Resolving Conflict

There are three groups of traders in the market: buyers, sellers, and unde­cided traders. "Ask" is what a seller asks for his merchandise. "Bid" is what a buyer offers for that merchandise. Buyers and sellers are always in conflict.

Buyers want to pay as little as possible, and sellers want to charge as much as possible. If members of both groups insist on having their way, no trade can take place. No trade means no price — only wishful quotes of buy­ers and sellers.

A seller has a choice: to wait until prices rise, or to accept a lower offer for his merchandise. A buyer also has a choice: to wait until prices come down, or to offer to pay more to the sellers.

A trade occurs when there is a momentary meeting of two minds: An eager bull agrees to a seller's terms and pays up, or an eager bear agrees to a buyer's terms and sells a little cheaper. The presence of undecided traders puts pressure on both bulls and bears.

When a buyer and a seller bargain in private, they may haggle at a

leisurely pace. The two must move much faster when they bargain at the exchange. They know that they are surrounded by a crowd of other traders who may butt in on their deal at any moment.

The buyer knows that if he thinks for too long, another trader can step in and snap away his bargain. A seller knows that if he tries to hold out for a higher price, another trader may step in and sell at a lower price. The crowd of undecided traders makes buyers and sellers more anxious to accommodate their opponents. A trade occurs when there is a meeting of two minds.

A Consensus of Value

Each tick on your quote screen represents a deal between a buyer and a seller. Buyers are buying because they expect prices to rise. Sellers are selling because they expect prices to fall. Buyers and sellers trade while surrounded by crowds of undecided traders. They may become buyers or sellers as prices change or as time passes.

Buying by bulls pushes markets up, selling by bears pushes markets down, and undecided traders make everything happen faster by creating a sense of urgency in buyers and sellers.

Traders come to the markets from all over the world: in person, via com­puters, or through their brokers. Everybody has a chance to buy and to sell. Each price is a momentary consensus of value of all market participants, expressed in action. Price is a psychological event—a momentary balance of opinion between bulls and bears. Prices are created by masses of traders— buyers, sellers, and undecided people. The patterns of prices and volume reflect the mass psychology of the markets.

Behavior Patterns

Huge crowds converge on stock, commodity, and option exchanges — either in person or represented by their brokers. Big money and little money, smart money and dumb money, institutional money and private money, all meet on the exchange floor. Each price represents a momentary consensus of value between buyers, sellers, and undecided traders at the moment of transaction. There is a crowd of traders behind every pattern in the chartbook.

Crowd consensus changes from moment to moment. Sometimes it gets established in a very low-key environment, and at other times the environment turns wild. Prices move in small increments during quiet times. When a crowd becomes either spooked or elated, prices begin to jump. Imagine bidding for a life preserver aboard a sinking ship —that's how prices leap when masses of traders become emotional about a trend. An astute trader tries to enter the market during quiet times and take profits during wild times.

Technical analysts study swings of mass psychology in the financial markets. Each trading session is a battle between bulls, who make money when prices rise, and bears, who profit when prices fall. The goal of technical ana­lysts is to discover the balance of power between bulls and bears and bet on the winning group. If bulls are much stronger, you should buy and hold. If bears are much stronger, you should sell and sell short. If both camps are about equal in strength, a wise trader stands aside. He lets bullies fight with each other and puts on a trade only when he is reasonably sure who is likely to win.

Prices, volume, and open interest reflect crowd behavior. So do the indica­tors that are based on them. This makes technical analysis similar to poll-taking. Both combine science and art: They are scientific to the extent that we use statistical methods and computers; they are artistic to the extent that we use personal judgment to interpret our findings.

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