Since it is a Friday before a 3 day holiday weekend, it is a good time to kick back and think about what the recent market action might (or might not) mean.
• Most Day-to-day market action is noise, There is very little signal involved, with the vast majority of commentary simply after-the-fact rationalizations of what just occurred.
• Over the years, one of the few exceptions that I have found to the daily noise is the IntraDay reversal. After a long move in either direction, followed by a big flip can be significant (worrisome, if not conclusive).
• Hence, I do pay attention to days like Wednesday that start out strong and end weak. The caveat: All bets are off on FOMC minute days, as we seem to have a big spike in volatility (someone must have done a study on this).
• Never confuse a forecast with an analysis.
• Consider a day that starts out 150 Dow points up (or down) and ending the day down (or up) 150. That 300 point swing is more significant than a down (up) 300 point day. We sometimes see it at major tops and bottoms, as it reflects an exhaustion of one side in the battle of supply and demand. (Candlestick technicians have the data on shooting stars and dojis; if this sort of stuff interests you, then see Steve Nison’s book Japanese Candlestick Charting Techniques).
• Of course, all of this can reflect your biases, holdings, fears and worries. That is why I try to think about issues such as these in the abstract, rather than referencing current positions — to avoid my own b9iases and get stuck int he trap of merely talking my book.
• The alternative is allowing markets to serve as Rorschach tests, reflecting peoples pre-existing investment postures — not what they truly think. This an ongoing pundit problem.
• Be aware of your own timeline — are you a trader or an investor? Then act like it.
• Bears see the intraday reversal (like Wednesday’s) as a very significant change in tone; Bulls see a comeback (like Thursday’s) as proof of a Japanese overreaction to weak China economic news — something inapplicable to the US markets.
• Lately, it seems that markets close the day much stronger than the early morning futures would imply. I’d love to see the actual data on that (Closes vs AM Futures). It is similar to what used to be called the Smart Money Index, something created by Don Hays. (I have no clue if SMI has any insight).
• My key takeaway is that the cognitive bias is immense. Most of the attempts we see to interpret short or even intermediate term market action are often overwhelmingly filled with rationalizations of existing positions.
• Be aware of the tendency to let Narratives obscure the data.
• Raymond James’ Jeff Saut is fond of saying “Where you stand is a function of where you sit.” Meaning, your book often reflects how and what you think.
• So much of what we have learned from the data is counter-intuitive.
• The most challenging thing confronting the vast majority of investors is their inability to make objective, emotion-free decisions based on empirical data. Instincts, hunches and emotions are killers when it comes to the markets.
Identifying the cognitive errors we make is only the first step; Developing a way to respond to them, preventing this aspect of our personalities from affecting investing decisions is an ongoing, indeed, never-ending process.
What are you doing to prevent your biases and emotions from getting in your own way?