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?

Category: Investing, Markets, Psychology, Rules, Sentiment, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “Random Thoughts: Comebacks, Intraday Reversals and the like”

  1. Derektheunder says:

    What I am doing is being 75% in cash. It’s the most aggressive allocation that will let me sleep at night.

  2. Molesworth says:

    Thank you for sharing. Just read joshs notes on el erian conference. Very smart guy but I worry when so much is explained using metaphors. You are clearer imho.

  3. chomen says:

    I buy the 4 week highs and sell the 2 week lows.

  4. Joe says:

    One of the best lessons I ever learned is that although everybody wants to focus on “long term “, you have to remember that what makes up the long term is a series of short term events. Hell Yes!! The engulfing down side candle stick is significant! For all the reasons enumerated here and elsewhere, you have to take note of it. But what is even more important than an outside down day is what happens after it.

    The market is a mosaic mural. The tiniest discrete events make up more significant events, which are confirmed or invalidated by what comes after. That means that the right thing to do is often to spring into action. Unless of course, it is to take a step back and wait for more information.

    Thursday I took a step back instead of doing a major lightening up of a WFO investing portfolio. At the end of the day, it was the right thing to do. This morning, it wasn’t for a few minutes, but it looks better now. I’ll know immeasurably more in a coupla weeks. A sail across the ocean is another good analogy. Getting the major direction right is hugely more important than holding on for a minute less before tacking back the other direction at 2:00 Wed afternoon, the 2nd week of the voyage. Unless it wasn’t. Somethings you can’t anticipate, somethings you can’t dodge until you see them on top of you, and sometimes senseless panic over what wasn’t really there turns out to have been a brilliant move.

    It helps if you find that the underlying chaos, emotion, and randomness of the real world is a great leveler.

  5. Derektheunder says:

    That’s good stuff, Joe.

  6. PeterR says:

    “My key takeaway is that the cognitive bias is immense.”

    Amen!

    PS — Have a good long weekend . . .

  7. nofoulsontheplayground says:

    I use Charts, charts, and more charts.

    I Avoid story narratives. I Never watch financial news channels.

    I also use monthly and weekly charts for the underlying trends.

    Don’t fight the Fed, and don’t fight POMO days (today is not a POMO day).

  8. [...] Random thoughts: comebacks, intraday reversals, and the like (The Big Picture). Putting Wednesday’s crazy market action into perspective. An especially worthwhile reminder: “Be aware of your own timeline.” [...]