The Important Question Traders Must Ask

Last November I wrote a blog post titled, The Biggest Question Traders Face, in it I discuss the biggest question traders face is how tall is the mountain? The mountain being the stock market.  The tallest mountain in the world is Mt. Everest at 29,029 feet, and the sixth tallest mountain is Mt. Cho Oyu at 26,906 feet. If you were climbing Everest with the same level of training and expectation as Mt. Cho Oyu you’re likely to not make it to the top.

This same concept applies to trading. We see citations of near-record high margin debt and comparisons to 2000 and 2007. But who are we to say that the current climb we are on is the same “height” as those we made going into 2000 and ’07?  In 1997 margin debt more than doubled from 1994 levels and was even three times higher by 1999. We weren’t climbing Mt. Cho Oyu, we were climbing Everest and an Everest-like decline eventually followed!

In the lens I chose to use when viewing the market, sentiment is important. I believe humans repeat themselves and patterns are likely to occur. However, nothing is perfect as we saw numerous signs of lofty sentiment polls and data sets all throughout 2013, none of which were able to stop the market from climbing higher. Traders chose to focus on the Fed’s stimulus program and were confident Bernanke would not let them down.

On February 21st, the Wall Street Journal published an article titled, Small Investors Jump Back into the Trading Game. Joe Light and Julie Steinberg discuss the 17% to 28% increase in daily trading volume seen at E*Trade, TD Ameritrade, and Charles Schwab and how this is a sign of the retail trader deploying cash that had been scared to the sidelines during the 2008 financial crisis. The anecdotal stories contained in this article are what concern me. The authors mention a 63-year-old retiree who went to all cash in the throes of ’08 but is now “found herself moving into and out of cash quickly as she tries to get a feel for which direction the market is headed.” And also of a 22-year-old real estate broker who tells a story of trading futures contracts while out on a date.

While these are just a couple of anecdotes of small investors trading again, these aren’t stories you find at the base of Stock Market Mountain. At the same time we cannot know if we’ve climbing Mt. Cho Oyu, K2 which is the second tallest mountain in the world, or if we are approaching the peak of Mt. Everest. The title of our mountain can only be written once it’s behind us. I do not write this to call for a top to the market as that cannot be done with sentiment data alone. 


However, if history is our guide, seeing mom and pop investors trading again is not a good sign but also does not bring with it the mountain’s summit.  The biggest question traders face continues to be, and always will be, how tall is the mountain?

Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.


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: My piece for @traderplanet takes a look at one of the biggest question traders must ask regarding the market $$
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edjaworska1: The Important Question Traders Must Ask via @TraderPlanet
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: RT @TraderPlanet: The Important Question Traders Must Ask <Look at Mom and Pop> via @Andrewthrasher $ES_F $SPX $SPY…
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Visitor - Bruce: Right, just like the taxi driver stock tips at the peak. Sad really for the retail public, always drawn in at tops.
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AndrewThrasher: Yes it is sad, but when you think about it - it has to be this way. Those with the least amount of information are to be the last to take action. Those that are not involved with the markets as trading professionals are least like to gain information needed for them to feel a trade or investment is necessary. Once the last group has placed their bets we begin to run out of demand which is what creates the beginning of a down cycle (bear market).