From The Reformed Broker:
... One factor we contribute to the S&P 500's 13% rally from its November low is a positive feedback loop.
Specifically, the initial price surge off of the mid-November low, catalyzed by a belief that a year-end budget agreement would occur, turned a mixed sentiment setting increasingly optimistic and roused additional gains as new longs entered the market. These additional gains subsequently incited more optimism and yet another round of new longs; repeat process.
This loop establishes a basis for why momentum exists and why trends form. The assumption is that the loop will continue until bullish positioning is stretched and sentiment is consequently at an extreme.
When fewer longs are left to propel stocks higher, the market's rate of ascent subsequently declines and price will generally level off. Then as supply and demand come into balance, a small disturbance can be intensified by a negative feedback loop and initiate this circuit in the opposite direction.
The tendency for these sentiment shifts to be gradual rather than abrupt is why...
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