Nasdaq Composite: Rise of the Noise Traders

12 mag 2021

I have to highlight that, the American stock market in 2021 is fundamentally different from the market in 2018 or 2019. Unprecedented amount of new investors have jumped into the stock market since April 2020, lured by zero commission brokers, close to zero interest rate and the boredom of COVID restrictions. Like I have mentioned before, the period of 2020-2025 bear many similarities with 1921-1929 and 1995-2000, e.g. pent up demand from the Great War and Spanish flu, super easy monetary policy, everyone suddenly becoming interested in the stocks.

Perhaps the majority of those new investors can be identified as noise traders of behavioral finance. They believe in information which they think would help them make quick profits but in fact they are no better than random noise. A market full of noise traders tend to either overreact or delay reaction against important news, making the efficient market hypothesis completely unrealistic. The market might be overreacting to the potential of high inflation right now, so IXIC will probably drop to 12400, testing the 200-day and 10-month moving average and forming a double bottom with the 5 March 2021 trough.

Sooner or later, noise traders will realise that it is still too early to worry about monetary tightening, then IXIC will roar back into 14000s, going up to 17000 in late August and early September.

The tech stock market is highly sentimental right now. If we get more good news in the second half of this year, IXIC could go as high as 20000 this year, in a similar fashion with the meteoric rise of 1997. Either way, the big picture remains extremely bullish, so the doomsayers and short-sellers would definitely be crushed by hordes of noise traders who don't give a damn about 'overbought technical indicators'.