What My Dogs Can Teach Us About Markets

 Some dogs run fast; other dogs do tricks … my 100 pound lab, Duke's best talent is his ability to remain immobile in almost any situation (some call it "laziness" … I prefer "calm" or "even-tempered").

At the other end of the spectrum is Boo, our 20 pound mix between a Beagle and a Boston terrier. Let's just say that he has higher metabolism than Duke. 

When Boo hears a noise, he lets out an involuntary, barely audible, sound.  His body becomes rigid and his head cocks.  He becomes alert and carefully tunes his ears to their most sensitive setting, seeking any information that will help identify the "danger." And now he's waiting for the next intrusion.

Usually there are no other disturbances to follow, and the noise is cataloged and soon forgotten. His alertness level slowly subsides over the next 10-15 minutes or so.  He'll go back to napping, a little more fitfully this time … and just a little bit on edge.

Things get a little more interesting when another noise surfaces shortly after the first one.  What could once be dismissed now must be treated as a threat - and just to be safe, a threat of the highest order.  Now the appropriate response is a series of barks, nervous glances, pacing, rushing off in the direction of the noise to investigate, and a barrage of barks meant to sound more menacing than the source of the noise.  Who or what is it? How much harm can they cause? How grave is the threat?

Duke is a different story.  Nothing upsets Duke more than Boo.  The same noise that prompted Boo to become alert does nothing to Duke.  However the first time that Boo makes noise, that makes Duke alert. And the second time Boo makes noise, Duke starts vocalizing, and the third time, well now both of them start yapping and when they both start yapping, then other dogs in the neighborhood start yapping.

I realized that the same thing happens in the market with people.

In the market, it is the second noise - and subsequent noises - that creates the equivalent of the Homeland Security "Red Alert." Once an elevated level of alertness has been established, it takes a long period of relative calm for it to subside.  And when on "Red Alert" … any additional noises (for example, the responses of the other market participants) - big or small - will highlight, magnify and further validate the issue.

But, like in the story "The Boy Who Cried Wolf," even legitimate threats are ignored after too many false alarms (or prolonged periods of constant alert).  So, bad news about the economy isn't as likely to get people excited after the past few weeks.