My thoughts on the market from the Forum
Good evening Team. I made a long post in the Trading Forum this morning that I thought you’d appreciate seeing. =============================================================Someone asked a question about WYNN. I think any move back to the 200-day MA will be sold into.
General market thoughts: It is my (admittedly fallible) opinion that this market is to be sold into. I could certainly be wrong…but I will maintain that bias until the current pattern changes.
One dynamic that I persistently see in this Forum (and elsewhere) is that people have a gut aversion to stocks going down. It bugs them. They get impatient and uncomfortable. Then, when something like the latest flavor of the month over in Europe occurs, last night’s bearishness magically brings about a complete memory wipe. A massive and sudden deletion of all thought and bias that existed prior to the event (here, the “Euro-TARP” program that all the socialists and banks seem to love so much).
The result? “Buy ’em!”
How does that work out? Well, let today be your yardstick. The market peaked 20 minutes after the open. All the lemmings rushed to buy this global game changer before everyone else could. Massive push among the retail crowd to get to the front of the line. Meanwhile, the pros simply backed away. They knew that the Euro-TARP was going to pass. It wasn’t really news…it was just a headline. There is a difference between news and headlines.
The buyers did indeed cut to the front of the line. (The only problem is that the line was not the line to profits. It was the line to the slaughter house.)
Then, as the retail buying waned (as it always does, because retail traders have limited capital — if it were otherwise, they would be professionals), the institutions were happy to start selling at higher prices because…they knew that the Euro-TARP does nothing to fix the underlying problem. Sure, it provides liquidity and “unfreezes” the credit market. But the credit market wasn’t really frozen — it’s just that lenders (i.e., bond buyers) are a bit more sophisticated than than the central banks would like them to be. So lenders (bond buyers) aren’t going to step up and buy bonds if they are perceived to be a bad deal.
Pros know this. Amateurs are still looking for the magic bullet.
This is why I continue to pound the table about the importance of viewing the news and commentary only as one source of information that can then be compared against the actual movement of the market. If the news is “good”, then why is the market going down? Is everyone stupid and is failing to realize that the news is good? If the news is “bad”, then why is the market going up? Are all these professional money managers so dumb that they cannot see that they should be selling rather than buying?
This is a constant dilemma created in the minds of traders who constantly view the market as rational, predictable, and simple. And when the market behaves (in the mind of the trader) irrationally, unpredictably and complex, the trader feels that he is being screwed. He complains about the market being “fixed”…about it being “rigged”. (He joins that pathetic and hapless group of butter heads down in lower Manhattan protesting against capitalism. This is one of the most amusing stories in the news right now: The lowest common denominator of society — dreadlocks, ugly knit caps with holes in their ear lobes large enough to store quarters, and folks who regret missing out on the ’60’s. All protesting against something too complex for their know-it-all minds to comprehend.)
Wouldn’t it be wonderful if the market was predictable? Good news? You buy stocks and make money. Bad news? You short stocks and make money.
If it were that easy, then there would be no losers — only winners. But take that to the logical and irrefutable conclusion. No one wins if no one loses. There can be no success if there is no failure. I challenge anyone to credibly refute this basic truth.
So if you want to start winning…then stop losing. And you can stop losing (at least…lose less) when you start trading along with the professionals. Now, professionals get confused too. They lose a lot. The difference between professionals and amateurs (including those who “used to trade before they realized that the market was fixed) is that professionals quickly recognize when they are wrong. They understand the risks associated with being wrong. Those risks can easily overpower the rewards of being right simply as a function of…math. (E.g., Lose 10%…you’ve got to make 11% just to get to even. Lose 20%…and you’ve got to make 25% to get back to even. Ignoring this simply mathematical equation is one of the biggest differences between successful money managers and unsuccessful amateurs.)
View the news as a catalyst for dislocation. Again, View the news as a catalyst for dislocation. You have your views. You know what you know. You don’t need a headline to tell you differently (unless you’ve been on vacation in Botswana for a while). So you look at the dislocation that results from the news and you then decide whether the dislocation is something to be traded along with…or traded against.
And a major component of that decision is simply experience. Everyone struggles with the same issues when they first start trading. (Those who start on professional trading desks don’t have such a struggle because they are told what to do by smarter, more experienced traders.) But the sooner you can understand crowd behavior, the sooner you can identify your personal tendencies that need to be addressed. And the sooner you identify those tendencies, the sooner you can start fixing the things that need to be fixed before you can trade successfully.
Note: I have seen this dynamic among retail traders for years. It is a general comment about the current market environment and its usual effect on retail traders. I first became aware of the prevalence of this dynamic back in 2001 when I began writing for TheStreet.com. When you receive hundreds (and ultimately, thousands) of emails from readers, trends become so obvious that they are undeniable. That’s the case with the dynamic I describe above.
As you know, I am not buying into all this BS that’s constantly being spewed about how these debt and spending issues can be solved. I think it’s horse…. Why? Again, it’s that pesky math. It’s a combination of spending too much and squeezing too many golden eggs out of the goose. Sooner or later, the goose can’t (or won’t) lay any more eggs because he’s tired of getting squeezed. Then all you’re left with is more spending.
BUT (and this is one big butt), I am always vigilant for new facts that make my opinion invalid or…wrong! And I’ll happily (and eagerly) change my bias. It’s easier and more fun to be bullish. Nobody likes a bear (particularly the camper who wakes up to see the bear’s snout under their tent looking for food). I am not wedded to my thesis. But I will maintain it until there is sufficient evidence that dictates a change. (And by the way, the most compelling evidence will be in the price action of the market. The market knows more than the wisest individual. The “collective wisdom” of the Crowd trumps any individual. Pay attention to the Crowd, and you’ll be on the right side of the trend before you even know the underlying reason for the trend.
OK, I’ve gone on long enough. Have a great day.
Dan
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