The stock exchange is driven solely by human emotion. Nothing else really matters. Human emotion is driven by perception, and perception is jaded by expectations. If your expectations aren’t fulfilled, than your perception is that this is awful. If your expectations are high, you likely will be disappointed. The trick then is to gauge the expectations that stock traders have at any given moment. Unfortunately there isn’t any reliable measurement that I know of to judge expectations.
Much of any days motion can be credited to the daily news. And the majority of the time that it could be narrowed down to the day’s financial news. There are naturally non-economic events which shape the dealer’s expectations. Politics, war, disasters, etc., but barring any unusual activity in these regions, the economic news is that the driving force of most trading day’s action. The notable exception is during’earnings season’, but we’ll be writing an entire article covering this at a later date. Suffice it to say however, earnings are the epitome of the theme presented here. Traders normally have situations in their minds, expectations in case you will. They expect inflation to fall or rise, interest rates therefore will fall or rise in lock step fashion with inflation. Indicators are used to forecast inflation like productivity, employment, consumer opinion etc.. And traders, have expectations of all of these figures as the month continues. They utilize their expectations to gauge if these amounts come in as good news or bad news. In large inflationary times, a report on higher unemployment really becomes a positive. Because greater unemployment means consumers have less money, thereby inflationary pressures will ease. But if the market is perceived to be in a recession, than a report on higher unemployment is regarded as negative, because we’re unlikely to pull ourselves out without people working.
And to increase the confusion there are occasions when the figures come in better than expected and the industry still tanks. What contributes to all of the confusing melting pot of expectations, expectations and emotions? Well, one thing that I can tell you, do not read too much into the conventional market reports given at the close of the trading day. They are valuable because they’re just a report driven by the exact emotions which drive the market. But their downfall is they don’t recognize this. Daily reports report the specific state of the human mind, without recognizing that the mind is the marketplace. They can not separate the two, and therefore their weakness is, that the mind is an ever changing environment, and rarely stays the exact same two times in a row. Unless there’s that rare and exceptional event that the whole world is focusing on. Sometimes the industry just sells off, since it’s time to. Sometimes it rallies because is just time to. If our expectations are that the market will go higher, since the financial data points that way, it will. But there’ll come a time, once the financial data fail to, or whenever our rosier than rosy scenario, shows a chink somewhere in that shining armor. And viola, nobody buys that day, or 2 days or week. Nothing in fact has changed except our emotions.
The secret to making money off all this really is, watch the expectations. Watch the senses, and then see the technical factors of the current market, and the businesses. If there’s a bull movement in housing state. Along with the underlying variables are there for home construction, i.e. low rates of interest. And the business is moving along just fine, without speculative fever. This is the time you see it, and wait. There’ll be some bad news on the way. Maybe even only a dip in housing permits, possibly an uptick in rates of interest, for a very silly reason. And observe the band wagon empty out. This is when you purchase, not while it’s falling, but if it stops falling. This is the easiest band wagon to jump on. One which is stopping at the bus stop. Do not jump on the bus, wait for it to stop. Likewise that’s when you jump off too, not after it has gone into reverse. But when it’s stopped. The simplest portion of any movement, is the center part. The beginning is really hard to see, the end is filled with unpredictability and wild price fluctuations, but ahh that centre. The dull old middle, filled with trading days, and little incremental cost jumps. Nobody prints articles about that, it’s not romantic or sexy.
It’s just profitable.
Another nice thing about the center of any movement, is it’s backed by strong financial data in its favor. Any time there’s unfortunate reports, people jump off gradually. The uptrend stops, not reverses. Because speculation has not hit yet. Expectations aren’t unrealistic. And it doesn’t appear in the reports yet. The daily reports are full of information about sectors which are either at the bottom or the top of the speculative run. Because without recognizing it they’re reporting on the sectors having the strongest emotions. And the two most powerful emotions driving the market are none besides fear and greed. And when are greed and fear are at their most notable, at the top and the bottom.
Trade without greed and fear, and you’ll trade well.
What to do about these daily reports? How to trade from these? You trade reverse them. Not the day they are published. When oil or home are booming out of control and everybody is talking about it. You place large cap oil and housing stocks in your watch list and wait. A month or two or three it is not exact science here. Dealing with human emotions never is, just ask Freudians. However, you wait, until they stop making news drops, until they begin making lower highs, then you brief them. Or vice versa when techs crashed. You wait, and if they stop making lower lows, you purchase them. However, not just any shares, large caps, quality stocks with real value, like earnings, assets, possibly even a dividend or 2. Shorting big caps makes sense too, as they are easier to borrow, and they pretty much follow the trend, in fact in many businesses they are the fad.