I often find myself hearing reasons or rationale for the stock market’s movements, which really is just a collection of emotions all packaged together to form a result. I have to ignore these comments, if I listen too carefully I may get swept up in trying to rationalize the action. Without trying to be too obvious, too much fear and the market goes down, but too much optimism and the market goes higher. We can see all of this played out on a chart too, I’ve said many times a technical chart is fear/greed displayed in graphic form.
Yet, the chart shows us a complete view of history. These are numbers and facts but open to interpretation of patterns, trends and momentum. The thought here interpreting the chart of human behavior (which never changes) could give us a clue as to the next move. It is the hard right edge of the chart that we look to establish, hence where price is going – which is no guarantee but history is a great guide.
I bring this topic to you as we are at new all time highs in the SPX 500, Dow Industrials and Russell 2K, and nearing some multi year milestones for the Nasdaq. Some have missed all or parts of a move, and that would be frustrating. You’ll never get that time or opportunity back again, will you? Many players are twisted and find themselves either under-invested or out of the game entirely, preferring the markets pull back to an appropriate buy point – because they have to and I will wait for it, right? Patience is a virtue and pullbacks are indeed opportunities, but to make a judgment can be misleading.
But we should all know the market is not that accommodating, preferring to make most everyone look foolish in their tactics. Is that how you are feeling if you’ve missed the boat this year? Last year? Since Jan 2012 when the markets really started to fly?
So, as we contemplate what we should be doing, and as you look at the attached chart and hopefully view it with an open mind, understand that we cannot dictate the current or future behavior of the markets. Being a long time market veteran, I have failed on just about every prediction I have ever tried to make, save for the ones that are open-ended (read: a broken clock is right twice a day).
Those predicting or looking for a market drop or dive for this or that reason will find themselves waiting for something that won’t likely happen in their time frame, which then creates frustration and angst – then an irrational response to move in when the timing could not be any worse. You see where I’m going here?
Success in trading and investing is not about predicting conditions, rather interpreting the behavior and learning to accept that it won’t likely change (markets go up/down with greed/fear), and using sentiment tools give us a leg up to discovering moments where turns are likely – regardless of our biases. We will talk about how to use sentiment and the different tools over the next couple of weeks.
Bob Lang, Senior Market Strategist and trades various option trading newsletter Explosive Options. Check out the updated site.