The markets also have a zeitgeist, a consistent mood that exists above and beyond the daily helter-skelter of short-term trading. Smart market participants should avoid following zeitgeist in a blind fashion. Knowledge of its nature allows one to participate in the phenomenon in an intelligent manner, not an ignorant manner, and get a leg up on other traders. Most importantly, knowledge of present moods and tendencies allows one to estimate how zeitgeist will change in the future, vital if one wishes to get in at the beginning of trends.

The zeitgeist plays a role in all markets; currencies, equities, commodities, bonds, and real-estate. Lurking somewhere within their respective movements, there is no master-key that opens the door in which it resides. Interpretation is primarily individual, varying from trader to trader. Nor is it easy to isolate large-scale moods. A psychologist analyzing a single mind in an attempt to understand how it clicks is engaging in a very difficult task, imagine trying to understand the collective financial mind. Thus, the trader's concept of zeitgeist is a bit like shooting in the dark with a dim flashlight - he will only sometimes correspond with true zeitgeist. Despite the impossibility of true knowledge, some concept of zeitgeist is necessary if the trader wishes to form opinions that allow him to buy and sell.

My current concept of Zeitgeist, the one I've been following for three or so years now, is based on my belief that others believe the world is a more negative place now than it was in the 1990's. This is partially a reaction to the old Zeitgeist, in which the NASDAQ was propelled to epic heights, the US dollar appreciated, and gold plumbed new lows. In this current zeitgeist:

The US Dollar is declining while gold and other currencies, particularly the euro, are rising.
In general this represents a flight from intangibles and flimsy paper to hard and tangible assets, a distancing from the US and an alignment with the neutral, a movement from new to old.

Equity markets declining while bonds and housing markets are rising
This represents the desire for simplicity, foreseeability, stability, conservative returns with less risk, the search for trust, a satisfaction with yield, and distaste with heady speculation.

Gold, natural gas, and oil rising
This trend represents paranoia, fear, and a lack of optimism.

The chart shows the relative performance of gold, the SP500, bonds, and the dollar. Note the steady turn that has occurred. First gold started to rise in 1999, then bonds in 2000 (I've plotted bond yields, prices move in an inverse manner). Later that year, the SP started its decline, and finally the US dollar began its fall in 2001-2002.

The current zeitgeist has been emerging since late 1999 or so. It has been marked by a realignment of the crowd's symbols, an institutional swapping of allegiances, a fundamental questioning of all values that drove the old zeitgeist along with the creation of new ones. When equities peaked in early 2000, its emergence accelerated. The fear and turbulence engendered by the collapse of the internet mania and the Nasdaq's 80% plunge are a fundamental aspect of it. Gold's rise in 2001 gave it legs, though the overall nature of it has come to be best represented by the bond market's unprecedented 3 year outperformance of stocks.

One uses the concept of zeitgeist by trading along with it. When gold gets too low, for example, I see it diverging from the general spirit of the age, presenting an excellent risk-reward opportunity to buy. When equities get too high, I sell them because I've spotted another opportunity. There are some aspects of the zeitgeist I don't feel comfortable trading with (bonds and housing) but for the most part, I stick with what I imagine to be the zeitgeist.

It is important to update one's concept of zeitgeist. The forward looking individual will attempt to make assumptions about changes in zeitgeist before they have occurred, preparing themself with initial positions and plans about how they will react to the change. Others may play it safe and update their concept of zeitgeist only after the change has already occurred.