Each market trend is generally driven by events and participants beliefs about what those events mean.

Recently we have had Europe driving the market “bus”. The market rises and falls based on what the majority believes about the sovereign bond yields. Each day as yields on European bonds rise and fall the market tries to price in the systemic risk based on available information. The market attempts to price in the probability of what effects present events will have on future prices. Volatility is caused much of the time when participants disagree about the future because there is so much uncertainty and unknowns. Markets tend to stay range bound when no new information enters the system.

The big trends are caused when fundamentals fall to the side and greed and fear take over. When investors and traders are scared they are missing out on easy money in an uptrend they jump in with no concern for p/e ratios or book values. When the prices rise quickly and easy money is flowing into their accounts greed takes over and it is hard to sell to lock in gains, greed causes participants to see higher prices in their minds and future.

Similarly when fear is “driving the bus” investors and traders are afraid of taking any more losses so they sell everything. They are not stopping to do research on a company’s future earnings potential when they are down $5,000, the pain is too much, they just sell.

When fear or greed is in the markets driver’s seat that is when money can be made on simply following the trend until it ends.