Monday, March 18, 2019

Making Sense of This Stock Market

I've been hearing from many confused traders who have underperformed the overall market during this run from the December lows.  The common refrain is that they are waiting for a pullback to enter the trend--or they are looking for the start of a larger move to the downside.  I heard this late in January, then in February, and now in March.  Aren't we due for a substantial correction?

Let's get a little perspective.  Above I've charted one of my favorite indicators, the cumulative NYSE TICK (red line), versus SPY (blue line).  The cumulative TICK takes the average five minute reading of upticks versus downticks for all NYSE stocks and adds the value for the current five-minute period to the running total.  It thus works similar to an advance-decline line, but is much more sensitive to short-term strength and weakness.

Note how the cumulative TICK line topped out well before the overall market peak last year.  This led me to question the viability of the rising market.   Indeed, the market--and the cumulative measure--fell precipitously during the fourth quarter of 2018.  Then, however, with the dramatic turnaround in Fed policy, we saw a dramatic move higher in stocks--and in the cumulative TICK measure.  As I pointed out earlier this month, this kind of strength is typical of bull market momentum, not a market getting ready to roll over.  Very recently, we've seen some breadth divergences with fewer stocks making fresh one- and three-month highs, but until we see a meaningful expansion of short-term new lows and a sustained turn in the TICK measure, it's difficult to make a case for more than normal pullbacks.

One of the problems that I'm seeing is that traders committed themselves to a bear view late in 2018 and have been fighting the recent rising tide ever since.  That getting locked into a view is a classic case of ego-based trading, where being "right" becomes more important than following the market.  In the recent Forbes article, I summarize fascinating research dealing with dark and light sides of our personalities and their impact on our trading performance.  (Check out the links at the end of the article, which lead you to a free online test that allows you to get feedback on your own light and dark traits!)  An important implication of this perspective is that we need to channel our ego needs in constructive ways so that they don't color our trading.  We don't trade well by making market calls.  We trade well by sensitively following what markets are actually doing.