It seems like just yesterday everyone was scratching their heads at the rally the market was experiencing in the second quarter of this year. This was, of course, after the scare from earlier at the beginning of the year. At that point, hardly anyone could have foreseen the roller coaster that would be the global markets up to this point.
As the BREXIT vote in the UK drew closer, the hand ringing began in earnest again. That’s because most investors are always caught up in the news of the moment, and have become unreceptive to any information that would change the status quo. If you stop and think about financial markets, there is always something on the horizon that can cause uncertainty. That’s the nature of the markets.
Something else we can always count on, year in and year out, is the ever present human factor of fear and greed, no matter what day of the year it happens to be.
This year, just like all other years, we will find investors and traders alike slow to respond to the shifts in the market’s direction. That’s because humans are stricken with what psychologists refer to as “confirmation bias.” This is the natural tendency for people to seek out information that will affirm their beliefs, or in the case of trading, data that will validate the decision to buy or sell a security.
This bias is taken one step further as folks seek out like-minded individuals throughout chat rooms, social media and the internet in an effort to comfort themselves in the knowledge that many other people have made a similar trade, thus confirming that the RIGHT decision was made. The worst part of this bias is that when adverse information is presented, it is usually dismissed as spurious and for the most part ignored. This condition is very prevalent in the realm of financial speculation; and it can be directly attributable to the systematic destruction of many brokerage accounts. Unfortunately, this is a very common human shortcoming.
After all the market’s gyrations this year, the markets are essentially flat for 2016. Even with all of the uncertainty surrounding Europe, Brexit, the US elections and various other concerns, the picture for the rest of the year doesn’t look much different. At the time of this writing, the S&P 500 has rallied almost 100 points off the Brexit lows and is very close to pre-Brexit levels. And the beat goes on. Or shall I say the beating goes on for those that are still short and didn’t have the flexibility to change their bias.
The point here, is that no matter what occurs in the market a trader should stay the course in terms of following a low risk, high probability, high reward strategy that identifies shifts in supply and demand. That’s because very little changes in the market year to year in terms of where prices are likely to turn (larger time frame supply and demand levels). Also, little changes in terms of those that consistently lose, or those that make money trading. Those traders who don’t have a viable strategy, or who fail to exercise self-discipline will most always be on the losing side of the trade. The likely winners are those that do the exactly the opposite. Of these two groups, in which category do you fall into?
Until next time, I hope everyone has a great summer