Sunday, April 13, 2014

Dealing With Market Insanity

In The Psychology of Trading, I told the story of the psychiatric patient who repeated over and over that he was a department store.  One junior therapist after another tried asking questions of the man and he only repeated, "I'm Woolworth store!  I'm TG&Y store!"  Needless to say, the trainees thought the man was completely crazy and could not be a candidate for talk therapy.  Medications would be needed to bring him into contact with reality.

A senior trainee, however, sat patiently with the man.  When he proclaimed that he was a retail outlet, she calmly asked, "What's for sale?"  The man looked at her intently and said that nothing was for sale.  When she asked him why, he explained that the shelves were bare.  She then asked why he had no products and, lo and behold, a discussion about feeling empty ensued.  The man made perfect sense if you accepted him on his terms.

So it is with markets.

A trader recently told me that trading the markets was "insanity".  Nothing made sense, he explained.  None of the moves could be explained by fundamentals.  The economy was firming; rates remain low:  why are stocks selling off?  If the Fed is tapering and readying markets for a rate rise, why is fixed income rallying?  It's insane.

I thought of Woolworth Man.  So often, what doesn't make logical sense makes good psycho-logical sense.

When traders had the Fed at their backs, money flowed into speculative issues.  From the end of last year to late February alone, TSLA practically doubled.  It was up roughly 5x in the past year before moving down about 20% from that February peak.  The biotechnology ETF IBB rose over 50% in the past year, also hitting a peak in late February--and since is down over 20%.  But utility shares (XLU) and consumer staples stocks (XLP)?  They're not far off their highs at all.

Investors are acting as if the Fed no longer has their backs.  They are sticking with stability and selling momentum.  They started the year with the perception of tailwinds and now are behaving as if they're facing headwinds.  That makes them take risk off the table.

So the market falls, the growth companies drop, assets that were held for their strength move lower, and it doesn't make sense.  Insanity.

Except to the seasoned traders who calmly enter the room and ask the crazy market, "What's for sale?"

Further Reading:  Life Insights From Great Inventors

2 comments:

Y Mender said...

Dr. Brett,
Welcome back. It's great to read your new and profound analyses of trading challenges and opportunities that traders encounter everyday.
Thank you for continuing the generosity and sharing your valuable active knowledge and real-time experience with all of us.

Oscar Wildedog said...

So everything has to be logical, fit into a pattern or have a narrative to make sense, eh? Sounds like the recipe for religious belief, psychics, miracle diets and the like. Oh, and BTW, the Dodgers will win the World Series because everybody knows they have the biggest payroll.