The stock market is fundamentally driven by two forces. The first is quan-
titative, dictated by the efficient market hypothesis, that an asset’s trading
market value is intrinsically linked to the microeconomic performance of the
asset. The logic behind this driving force is so simple as to be almost trivial
– that the collective action of every trader taking a position in an asset will
encapsulate all information about that asset, thus driving it to an equilib-
rium reflecting its true value. However, traders do not take positions based
on their belief of an asset’s price. Traders do not take positions based on
their belief of an asset’s future price, either. Traders take positions based on
their perception of what other traders believe about an asset’s future perfor-
mance. This nuance leads to the second force responsible for determining
price action in stocks: participant sentiment.
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