Non Rational Markets

Until you accept the fact that markets and price action are non rational - you're likely to find yourself attempting to use logic to explain the markets behaviour. This is a losing game because of the absurdity in labelling headlines, such as "The Fiscal Cliff", "Europe's Implosion" and the "Middle East Violence", as causes of market action. In fact, these headlines are the affects of the social psychological forces in motion (in realtime). As with an individual, it's no different for the crowd (in the aggregate) - it's how we feel that determines our behaviour. 

Essentially, this is our nature as humans and it's the trigger (cause) of boom-bust cycles ... 

We are all living in the same price environment and react similarly to the threats and opportunities that the environment presents. But the interesting thing is that our reaction to the price environment actually CHANGES the price environment. As participation in a trend expands - for example, causing rising stock prices or fuel prices, etc. It influences mass expectations for prices in the future. But it also detracts from the supply of people who are willing and able to buy at higher prices, thus creating the conditions that will eventually create the subsequent bust, when belief in the new downtrend feeds on itself and the whole participation cycle repeats in the opposite direction.

This is why George Soros says that "prices influence expectations, and expectations influence prices" (the general theory of reflexivity).  In other words, there is a feedback loop between prices and expectations. Most observers call the apparently irrational price movements that inevitably result from this feedback loop "market failures". In fact, market irrationality is more accurately thought of as the net result of millions of individual decisions made by self-interested individual participants who are not aware that the emotions they are feeling regarding price action are in fact collectively DRIVING the price action. Common terms such as "rational" or "irrational" don't accurately describe this explanation for price behavior. Therefore, those who study and follow the internal dynamics of the market using a technical lens instead say that market movements are "non-rational."

Observing the price cycles in individual financial markets is interesting in and of itself. But the other interesting by-product of the feedback loop between prices and expectations is the actual shifts in fundamental conditions that result from them. For example, a housing boom results in oversupply of homes. An oil boom stimulates the search for alternative fuel supplies. An economic boom stimulates entrepreneurs to create even more amazing innovations that add to the richness of modern life - as well as wealth, which eventually leads to complacency among future generations, and thus relative decline among nations. Market tops are made of optimism while bottoms of pessimism. The cycles of human history never end.