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TheStreet Open House

A Technical Snap Shot Of Current Investor Psychology

By Bill DeShurko

The mistake people make in trying to use technical analysis is that they assume that somehow a chart magically alerts the follower as to when to buy or sell. That is simply wishful thinking. What technical analysis does is give us a picture of investors’ psychology. Taken a step further, a good technical analyst (more likely a good computer program) can tell that when investors’ psychology is at a certain point as measured by a technical indicator, the market, more often than not, reacts in a given way.

But we humans are fickle. Sometimes when we are depressed we react by eating a gallon of ice cream. Other times, by going to the gym and getting the endorphins going. But what a technical analysis–or Google (GOOG) or Facebook (FB)–would do is know that more often than not we choose one activity over the other.

Facebook reacts by placing ads for Ben and Jerry’s on your Facebook page. A technical investor reacts by buying or selling a security based on the history of an indicator. Not that either are right all the time, but if applied consistently, in theory, both Facebook and the investor can potentially take advantage of human behavior patterns.

I bring this up because I saw two interesting patterns this morning as I was looking over the carnage from last week. The first is for Prospect Capital Corp. ( NASDAQ: PSEC), a business development company. A little background. Business development companies (BDCs) help small companies in early stages of development (similar to venture capital firms).

They have been around in the US since 1980 when Congress amended the Investment Company Act of 1940. The amendment essentially gave individual investors the opportunity to invest in a publicly-traded private-equity firm. The tax structure is similar to a real estate investment trust (REIT), in that if the company meets certain requirements, it pays little income tax. However, the company then must return a minimum of 90% of taxable income as dividends.

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