We saw some fairly serious selling pressure in Europe last night with attention turning to Italy, where it looks like they’ll have trouble forming a government. An Italian bond auction also fell short of expectations and so interest rates there headed sharply higher.
The banks of Europe have been hit over the last few days since the announcement of the Cyprus deal and the bumbling honesty of the Dutch Finance Minister Dijsselbloem (say that three times quickly).
The banks that are attached to the teat of the ECB via the LTRO (Long Term Refinancing Operation) are the main ones coming under fire, as you would expect.
But once again we were saved from the gates of hell by the US market, which opened down but then steadily rallied all day long to close pretty much flat on the day on very low volume and the lowest average trade size of the year.
Credit markets in the US are not being dragged along for the ride to the upside, and whenever a divergence opens up between credit and equities you can be sure it is equities that are living in dream land…
But the fact is the old saying about the market is right. ‘Where the market goes that’s where it is.’ It sounds like a silly statement when you first read it, but when you think about it there is some good advice to be gleaned.
Our perception of the market is not the market. Whether or not the market is a completely fraudulent, manipulated farce (which it is) doesn’t matter. What matters is the price and only the price. We have to play by the rules we are given and there is very little point in jumping up and down when the price action doesn’t agree with our expectations.
Fighting the market is a losing game ultimately. Who is your opponent when you are fighting the market? It doesn’t take too long to work out that you are fighting yourself. The market is always neutral.
It doesn’t really care if you make a million dollars or lose your shirt. The battle is always internal. Every skip of the heart as prices move is caused not by the market but by our reaction to it.
As Marcus Aurelius, an Emperor of Rome and one of the great Stoic philosophers, put it, ‘Stop perceiving the pain you imagine and you’ll remain completely unaffected. External things are not the problem. It’s your assessment of them. Which you can erase right now. If the problem is something in your own character, who’s stopping you from setting your mind straight?’
And just to force the point home he also said, ‘I can control my thoughts as necessary; then how can I be troubled? What is outside my mind means nothing to it. Absorb that lesson and your feet stand firm.’
Marcus Aurelius fought battles with the rampaging Germanic hordes in the last decade of his life while he wrote the aphorisms above in an amazing book called The Meditations. If anyone has the right to give us advice on how to cope with the vagaries of life it is him.
I think we all know that it would take a super human effort to remain unaffected by everything that occurs externally from us. We are emotional beings filled with ego. It sounds great in theory to stand aloof from the market and make decisions without an ounce of internal disturbance.
I think the best we can hope for is to understand how irrational we can be in the face of a gyrating market and create as many rules as necessary to place a straightjacket around our impulses.
That is really the basis of technical analysis for me. It is not a crystal ball. It is just a windsock that gives you a hint of the underlying forces driving the market.
It helps to create lines in the sand where I can accept that I am wrong quickly rather than relying on hope, which we all know ‘springs eternal’. If you are interested, have a look at a presentation I have done about my trading approach and why I think there are some great trading opportunities coming up. You can view it here.
What I find intriguing about the current rally is that my trending indicators all turned up late last year but I chose to ignore them because I am fundamentally bearish. The feeling that, ‘I am right and the market is wrong,’ is a hard one to shake. The market, of course, is always right.
This then throws up the challenge to let go of all ‘views’ about the market and to rely purely on your technical indicators for all trading decisions. There is no doubt that whatever your view on the market happens to be there will always be a period where the market will make a fool of you.
The bulls get killed in bear markets and the bears are skewered in bull markets, like now. I don’t know of anyone who is bullish in bull markets and bearish in bear markets and constantly gets the shift in trends right. No one.
Most market commentators aren’t traders. They just wax lyrical about the markets and their views but they never say when they are proven right and when they are proven wrong. No targets and no stop losses, just sweeping views that make it impossible to pin them down later for being wrong.
Actually trading the markets is a completely different kettle of fish. Volatility is so intense that you can be completely right about your big picture view, but if your timing is out you lose money. You can get stopped out of a stock and then watch in horror as it turns around almost immediately and heads in the direction you expected.
When that happens should you jump back in? It’s moments like these that no one tells you about before you start trading. The learning curve when entering the markets is immense and really it’s never ending because the market itself is always changing.
The rise of High Frequency Trading (HFT) has changed the structure of price action, perhaps forever if the regulators aren’t willing to step in and level the playing field.
Another factor affecting asset markets is of course the worldwide money printing and ZIRP (zero interest rate policy) of the major central banks.
This is a new world that we live in. How long this game lasts is really anyone’s guess. I think there are many people that know it can’t go on forever but as always it all comes down to timing.
My ‘view’ is that we are close to a major market top, but as I said above ‘views’ aren’t worth all that much. While the trend remains up in the US markets I will just have to accept the fact, and wait until my charts tell me that the trend has changed.
So get prepared for the headlines screaming that all is well and new all-time highs have been reached in the S+P 500. But don’t believe for a minute that the price of the market is a true reflection of the state of the real world.
Editor, Slipstream Trader
From the Port Phillip Publishing Library
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