“Have there been any studies on the effects of emotion and people’s general “feelings” on the markets and how the markets are affected by them?”
Rational market theory is only valid in the long-term. Short term valuations can be irrational, as seen in CA home prices right now, and at any time in some stock or another.
Benjamin Graham described a hypothetical “Mr. Market” crazy guy with wild mood swings as a way to explain this phenomenon. A company’s fundamentals don’t swing rapidly or widely, so why should the stock price? It’s crazy Mr. Market, he’s at it again! Buy only when the crazy guy is offering you a great price.
