Perception is reality -- or so the saying goes. That idea may bring success in politics, but it's a recipe for failure in the financial markets.
When your portfolio is at stake, perception is just that and nothing more. Perception may or may not be correct. Reality, on the other hand, is always accurate -- whether you or I perceive it correctly or not.
When I put a long spoon in a glass of water, I perceive that the spoon is bending. But it doesn't bend. In some places in the 1600s some eccentric behaviors were perceived as witchcraft. The unfortunate people who exhibited these behaviors were not witches, but they were burned at the stake anyway.
The phrase "perception is reality" has been pronounced so often that some people think that to repeat it makes it true.
Oft-repeated phrases are often heard in the world of finance. Too many are accepted as true even though they're false. The problem? -- Nobody takes the spoon out of the water to see if it's really bent.
The February 2010 Elliott Wave Theorist examines a list of assertions which all have a striking similarity, namely a lack of evidence to support them.
Let's consider one: "Rising oil prices are bearish for stocks." That's the perception in the media and among many investors. Is it true? Look at the correlation between oil and aggregate stock prices at the bottom of the chart.
". . . for the past 15 years there has been no consistent relationship between the trends of oil prices and stock prices. Sometimes it is positive, sometimes it is negative. In fact, during this period it has been positive for more time than it has been negative!"
Elliott Wave Theorist, Feb. 2010
So much for the claim (perception) that oil prices influence stock prices. The wonderful attribute of charts like this one is that they tell the truth. It takes the spoon out of the water to see if it is really bent. It's incredible to realize that legions of financial "experts" don't even study the data! They simply repeat and apparently believe what they've too often heard.