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TheStreet Open House

Markets: Be Ready for Oedipus Negative in January

NEW YORK ( TheStreet) -- I like to consider myself an armchair psychologist. In the chicken/egg taxonomy of this phenomenon, the years of trying to understand the markets made me this way, not the other way around.

As you may know, there is an entire school of thought devoted to the irregularities and inefficiencies in the market known as behavioral finance. It's within this framework that I offer up the two charts below suggesting a striking degree of similarity between them.

Source: Facset, Standard & Poors, JP Morgan, Gary Goldberg Financial Services

The top one is Rubin's vase, named after the famous Danish psychologist Edgar Rubin. Looked at one way, it's a vase, looked at another, it's two faces. In the vernacular, this is known as an ambiguous or bi-stable form.

The chart below Rubin's vase, developed by my firm, shows the emotional well-being of investors correlated to market returns. The brown bars represent the S&P's annual return, the blue dots represent investors' emotional well-being, and the little red dots show the low point of the market in any given year. Note every year the market went into the red at some point. Also note that 25 of 32 years the market return was positive.

OK, now how is it that Rubin's vase and the chart immediately below are very similar, if not exactly alike?

Give up? OK, here's how. At first glance, the chart illustrates the very simple point that when markets are up, we feel good about them and our investments. But keep looking and another very important idea will begin to emerge: The greatest opportunities for gains come at the points where we feel negative about the markets.

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