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With the major banks improving their market share way beyond their own expectations, and this being achieved on the back of reducing broker commissions and not passing on the full Reserve Bank rate decreases, they can be forgiven for thinking that Christmas definitely came early this year.

In fact they have re-written all existing marketing philosophies by currently experiencing their strongest market position for 15 years. If any other business had treated its market channel and clients in this manner they would have drastically lost market share. So what is their secret?

Fear.

Customers have been frightened by news of non-banks, and banks in the US, closing their doors. This has led them to react in the same way market investors do when the stock market plummets. Investors shift to gold, and the price of gold has risen sharply in recent times.

Mums and Dads shifted to banks, as they perceive them as being gold' in these troubled times.
This perception was given a massive boost by the Federal Government's recent bank deposit guarantee. Some non-bank lenders, most recently GE Money, have only reinforced this perception by pulling out of the residential mortgage market.

This raises a significant question: Do markets react according to the release of factual market-based information, or are they ruled by the collective emotion of investors? To analyse this question properly would take several hundred pages of theory, tables, and time-line analysis.

In the interests of time, suffice it to say that the stock, property and commodity markets respond to the collective majority of expectations of investors. That is, if the majority of investors expect the price of a particular stock to increase, they buy that stock and the price goes up, fulfilling their expectations.

The reverse applies (as we have unfortunately witnessed over the preceding months) when investors expect a stock price to fall. They start selling, the price starts dropping, which fuels more selling and so on.
Again, expectations are fulfilled.

Of course, these investors have to sell their stock to someone, and these someone's' obviously believe the stock price will rise otherwise they would not buy it. However, because these investors are in the minority of expectations' their purchases of the stock are far smaller and therefore unable to stop the slide in its price.

More sellers than buyers, as any analyst will tell you, points to a stock price falling.

Mums and Dads are the same.
If the majority of them believe house prices will increase then they will look to purchase investment properties.
This leads to more buyers than sellers, which leads to competitive buying activity and more vocal auctions, putting pressure on prices which therefore increase.

I call this the Majority of Expectations' rule.

You can analyse line charts, candle-sticks, graph trends and so on but I believe it is the collective emotion of investors and public that cause market movements.

Restrict all our news, written and electronic, to Australian news only and market confidence will increase and the economy will recover. This would prove my Majority of Expectations' rule, but unfortunately will not occur.

Learn more about this author, Craig Pickering.
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