Don’t Predict: It Will Bias Buy/Sell Decisions
Are We In A Bull or Bear Market?
People often ask and pundits often debate the question: “Are we in a bull market that has just had a correction, or are we seeing the beginning of a new bear market?” People seem to debate such questions endlessly in the media and on Internet forums. Trying to predict the market is fun and can sometimes be satisfying to the ego. It is enjoyable to talk about such things at gatherings or around the water cooler. It gives a person a chance to look bright or knowledgeable. We all like to seem intelligent..
However, it is not intelligent for a trader to indulge in such activities. In fact, it is a big mistake for a serious trader to do so. Why? It entices the trader to develop a market bias. That is not all that it does. When the trader expresses an opinion to others, the trader then has a vested interest in that opinion being right. It reflects on his intelligence and expertise as a trader. That bias can influence decisions about buying or selling. When a position deteriorates, the trader might be more inclined to “hold and hope” rather than sell. If his opinion had not been aired publicly, he might sell more quickly.
Our own traders know that the most consistently profitable traders are those who have learned to live in the present. The trader should be focusing on “what is” rather than what he or she thinks “ought to be.” Market conditions are constantly changing. A trader’s perspective on a stock can change dramatically in a matter of minutes or even seconds. The trader can be more nimble with a mind that is flexible and free from the shackles of ego-satisfying pronouncements.
Let’s assume that the market has just had a sharp decline and that we conclude it is a bull market correction rather than a new bear market. The opinion that the decline is only a bull market correction has nothing to do with how we trade. We do not invest with the notion that the market is about to rise because we believe it is, after all, a bull market. Instead, we focus on what the primary trend is right now. For us, the primary trend is currently down, and it will remain down until it becomes flat or until it is no longer down, and it will remain in that condition until it changes again. The primary trend is the trend that is most important to your investment time-horizon for a particular investment. For example, if you are looking to capture the gain a stock makes in a week, then the fact that its 200-day moving average is declining may not be particularly important to you. However, a declining 20-day average could be very important. If the 200-day average is declining but the 20-day average is rising, then you might buy a stock that gaps above the upper boundary of a trading range on a 100% increase in volume. If you are looking for a gain of 5% or more in a week or two, the fact that the 200-day average is in decline may be irrelevant to you. On the other hand, for a long-term holder a rising 200-day average could be very important. That person might consider it irrelevant that the 10-day average is declining.
Our own stockdisciplines.com traders tend to use the 50-day moving average as an indicator of the general direction of the market. Within the context of that direction, there may be counter-currents. For example, we may have a declining 50-day average but a 20-day average that has started to rise. If the position we are considering is likely to be closed out in a week, then we may decide that the current trend is on our side. What we believe about the ultimate direction of the market is not important, nor is it relevant to what we do. What the market is doing right now with regard to the investment time-horizon for the stock under consideration is very important. Always invest with regard to the current context. Crystal balls are cloudy, sometimes deceptive, and always irrelevant when planning a trade.