Yesterday, I spent some time with my pal Vic Scherer discussing his path to becoming a successful trader and also the market statistics and persistence lists he compiles on his Daytrend Blog.
Yesterday, I spent some time with my pal Vic Scherer discussing his path to becoming a successful trader and also the market statistics and persistence lists he compiles on his Daytrend Blog.
On last night’s program, I discussed the psychological components of the recent sell off, highlighting those that are most telling including:
1. Blow off technical patterns among market leaders such as $LVS.
2. Rally in speculative names.
3. Extreme bullish shorter term sentiment readings.
4. Poor guidance from a tech bellweather – $CSCO.
Alone, none of these indicated lower prices, though, taken together we are able to formulate a diagnostic impression. You can watch here:
All one needs to do is log in and consistently over time engage a process of expressing ideas in the present while allowing others to likewise respond in good faith with their own best ideas.
The upshot is that thinkers across an endless variety of subjects who engage might arise and initiate new knowledge systems which are meritocratic.
Along the way, leaders will emerge who have been vetted more purely than ever before.
We are a witness to and a part of a constructivist revolution in which individuals now have the power to define themselves with their best thoughts.
There are a few posts from my old tumblog that continue to get a bunch of hits and, god bless the $GOOG, they look to me like some of the best ones i did. So I figured I would edit them a bit and repost them here on the new blog on occasion. This one is from early 2009 when we were just getting StockTwits going. I read it back today, believe that I nailed it with this post and that it remains very true.
Early psychoanalytic models were deterministic. That is they espoused a view of human nature as being mostly at the whims of forces beyond people’s control whether these forces were internal (needs, desires and conflicts) or external (war. political, socio-economic).
Some of the more recent dynamic models have run counter to a deterministic view. One in particular called constructivism arose out of the cognitive revolution and suggests that humans have much more control over identity development, the ways in which they perceive and act in the world and in turn the ways in which they are perceived by others.
The gist is that we construct our own realities through the narratives we create, the frames we incorporate, the actions we take, the relationships we foster and the ideas we express.
I’m a constructivist in a big way.
I don’t fault the determinists and understand that at the time such theories were built people actually had much less control of their lives due to political and technological limitations.
I bring all this up because I am observing and participating in a revolution based in part on web technologies which promote expression and the sharing of ideas. Many more people than ever before now have the opportunity and the medium to define themselves internally and to the world.
Specifically, I am talking about web based publishing platforms from WordPress to Tumblr to Twitter to StockTwits. People can now take the effort to craft their identity and evolve it over time through the expression of their ideas. What’s more we can do this in a global public space in which others might respond with their own ideas ensuing a dialog which has the potential to inform, inspire, provoke and ultimately foster knowledge and relationships.
Its no small thing that this more powerful capacity to construct, communicate and interact with others across the globe comes along at precisely a moment in history in which centralized idea power authorities are deteriorating. I include in this old guard governments, religious authorities, large media based and other institutions as well as financial institutions.
All one needs to do is log in and consistently over time engage a process of expressing ideas in the present while allowing others to likewise respond in good faith with their own best ideas.
The upshot is that thinkers across an endless variety of subjects who engage might arise and initiate new knowledge systems which are meritocratic.
Along the way, leaders will emerge who have been vetted more purely than ever before.
We are a witness to and a part of a constructivist revolution in which individuals now have the power to define themselves with their best thoughts.
Last night on StockTwits.TV’s Market Shrinkology Program, I went into much more depth regarding the Mean Reversion Heuristic that I blogged about yesterday.
If you found that post interesting, I think you will enjoy the program as I go much deeper into the evolutionary basis of this tendency as well as answer questions from the audience.
Last night on StockTwits.TV’s Market Shrinkology Program, I went into much more depth regarding the Mean Reversion Heuristic I blogged about yesterday.
If you found that post interesting, I think you will enjoy the program as I go much deeper into the evolutionary basis of this tendency as well as answer viewers’ questions.
Hope You Enjoy!
You do not need to be a brain surgeon to successfully trade stocks.
In fact, if you gave me the choice of which was more important, intelligence or cognitive flexibility, I would take the latter every time.
Here’s why.
The world around us is filled with instances in which things tend to revert to the mean.
If I flip a coin 100 times and happen to get 90 tails and 10 heads, chances are that the next 100 flips will wind up closer to 50-50.
In nature, most times in which outlier events occur, subsequent events move us back towards the mean.
As a result, humans have this natural tendency to expect mean reversion and to make judgments in accordance with their expectations.
This mean reversion heuristic in and of itself is not irrational and actually serves a useful function most of the time as it saves us the energy of having to make complex calculations in our head. It serves as an efficient mental short cut.
However, it can get us into trouble when we are trading markets.
Over shorter and even intermediate time periods, markets do not necessarily revert. In fact, some of the very best trading situations occur when an asset is strongly trending or when the reversion time frame is so long that it is inconsequential to the current trade or even the next dozen.
This is why traders often have a hard time buying stocks that have already moved higher or are making all time highs. The innate expectancy mean reversion heuristic voice pops up in the back of one’s head whispering, “its moved so far, it must revert, that is just nature.”
So, give me someone who can adapt, someone who is flexible over someone who is a rocket scientist any day because I can teach him to ignore that voice inside his head telling him that break outs must revert.
The mean reversion heuristic is just one more example of how conventional thinking styles that come hard wired in most of us and which serve us just fine in most environments require suspension in the trading turret.
I will speak at length on this topic tonight on Market Shrinkology at 9:30ET on StockTwitsTV.
Last week, I had the privilege of joining Marc Pearlman (no relation) on the You Money Matters Radio Program.
This was a special treat as Marc is very knowledgeable in the areas of market psychology and behavioral finance and so he asked a bunch of great questions and just the right challenging ones.
Last week, I had the privilege of joining Marc Pearlman (no relation) on the You Money Matters Radio Program.
This was a special treat as Marc is very knowledgeable in the areas of market psychology and behavioral finance and so he asked a bunch of great questions and just the right challenging ones.
Thanks Marc for having me on! I really enjoyed.
You can listen to the podcast here:
Yesterday, my wife and I spent a couple hours with friends at California WineWorks in Mahwah, NJ.
If you are a foodie and/or enjoy wines as well, this place is a must try.
The concept at the wineworks is simple and brilliant. You gather up a group of friends and make a bunch of wine together.
The WineWorks does all the heavy lifting and keeps you from ruining your vintage while teaching you the basics of wine making and allowing you to get your hands dirty.
They bring in the grapes from Napa, they have the experts walking you through each step and they make sure you operate the heavy machinery correctly. They even serve up the spirits and antipasta while you’re there.
Yesterday, on our first visit to the hidden warehouse, we did the crushing.
<< Here is a picture of my awesome wife mixing something or another.
I must admit that I did not contribute the most to our efforts yesterday and instead stayed in the background taking pictures and drinking wine.
Next week, our cabal will return and do some kind of squeezing and then put the wine in barrels.
Then, we will return again in 4 months and bottle the wine.
If anyone has a great idea for a name for our wine and/or a label design, please send it along. If I choose yours, I will send you a bottle. 🙂
On this episode of Market Shrinkology, I go into the details of a psychological model for assessing markets. This 3 pronged model examines technicals, sentiment and fundamentals and constructs a profile based on this integration of these three factors.
On this episode of Market Shrinkology, I go into the details of a psychological model for assessing markets. This 3 pronged model examines technicals, sentiment and fundamentals and constructs a profile based on this integration of these three factors.
This discussion fleshes out this post from earlier today introducing the 3 pronged model.
You can watch this episode below:
Last night, I made the following remark on The StockTwits Stream:
Just as everyone is becoming convinced the banks no longer matter, they will begin to again and in a big way $XLF $BAC
Since early September, the $XLF has traded in a tightening range between 14.25 and 15 even as the broader market has been grinding higher. I like buying premium on both sides here.
Similar to the indecisive (or consolidating) financial sector, the market, despite the upward bias, is sending off some mixed signals as I assess them psychologically and the action in this sector is a reflection of this indecision.
When pundits speak about the psychological aspects of the market, they are generally talking about sentiment. This is an inaccurate and overly narrow depiction of what a psychological assessment of the market is.
Psychology is not only about sentiment (or emotion) which is but one of several modes of experience. A more comprehensive psychological assessment of markets focuses on three modes of experience including sentiment (emotional), technical (behavioral) and fundamental (cognitive).
Sentiment
In one sense, market sentiment remains stubbornly moderate even in the face of a 10+% rally in the $SPX in less than 2 months. Many smart traders have been and continue to be underweight the market and have missed the run. I view the skepticism here as a net positive.
During some rallies, there is a tendency for traders who catch the move early to take profits too soon and then search in vain for a better entry, a cycle which helps to fuel higher prices.
On the other hand, the $VIX has been in a downtrend since the June spike and often regresses abruptly so there is heightened risk of a sudden even if brief correction.
Net Sentiment: Mixed to Positive
Technicals
Broad market behavior grinds higher in a 2 month uptrend and consolidates in a fashion that is more choppy than most swing traders prefer. As well, and more recently, volume has tapered.
As mentioned above, financials have not participated while the demise of their importance has been greatly exagerated. Rest assured, eventually they will matter.
At the same time though, speculative stocks including China plays are ripping higher which often represents speculation.
Net Technicals: Mixed to Positive.
Fundamentals
We can argue these all day long. Are we experiencing a recovery? Is QE2 ultimately poison? Is the job market on the cusp of improving as earnings recover? I view this as a neutral as I have no edge here whatsoever.
Taken together, I view the market with a mixed to positive bias. As such, I am taking less risk than usual here.
The one trade I do like involves getting long volatility in the banks on both sides. There is only so much further the $SPX can go without $XLF and if the banks break down they will pull the market down and display greater volatility.
Last night, SMB Capital aired a presentation on their StockTwitsTV program that I gave to their traders last week which focused on using guided visualization and relaxation to improve trading performance.
Last night, SMB Capital aired a presentation on their StockTwitsTV program that I gave to their traders last week which focused on using guided visualization and relaxation to improve trading performance.
I am a bit surprised and very pleased by the response the program is receieving and will make it a point to begin addressing some of the specific questions I’ve received in blog posts this week.
Meanwhile, if you missed the program, you can watch it here: