The market seems a bit sleepy this morning. I get it. It is coming down from its exciting first day back after a three-day break. Okay, so the market is tired, but it is still the market, and coming into a new year as we are, there is always lots to talk about. For example, now is a good time for all traders/investors to take a review, to look at how they will approach 2012. Now is a good time to talk remind us all that 2012 might be similar to 2011, and if that is the case, defining a defensive strategy could be the way to make your money grow in 2012. Another approach would be just the opposite – step into the ring swinging. Either way, one has to see the market as an opposing force in order to make any strategy work.
Both Sun Tzu and Mohammad said that “war is deception.” Well, financial markets are at war with your capital and your head. They bob and weave like a prizefighter, trying to lure and confuse us before delivering a knockout punch. Stocks play head games, sapping our conviction to buy or sell at precisely the moment when it makes sense to do so.
I inserted the above excerpt because it metaphorically illustrates my point – the market is an opposing force. I also inserted it because it suggests a mindset that could be dangerous for traders and investors. True, the market is an opposing force, but it is not an antagonistic force. It is not aware of itself or of our existence. The market simply is and it simply does. Its behavior is purely reactionary, responding to external stimuli only. Giving it any more power than that is not wise, as that could lead to making bad decisions. One should not see the market as sentient.
On the other hand, one should not dismiss the reality that the market has a psyche, a representation of thought expressed emotionally. Do not forget as we move in to 2012 the “market r us.” Whatever the market is doing, that movement represents our collective psyche, our fears and hopes, the choices we make as traders and investors.
Understanding this has helped me both adjust emotionally to the mood swings of the market (and there have been plenty in the last three years) and to better analyze the market. I can better analyze the market because I see the market as irrational, reactionary, and, importantly, driven by two engrained desires – to make money and to not lose money. The first desire is the only reason any of us are in the market, and the second desire flows from our innate fear of being in the market. It is a genetic throwback to the time when Man both hunted and was hunted. Hence, the writer of the excerpt above represented the market as a sentient being out to get us, to attack us, to outthink us in the ancient battle for survival. This is simply not the case. Do not give the market more power than it rightly deserves. Keep in mind the market is irrational and often contradictory in its desires.
U.S. manufacturing grew at its fastest pace in six months in December, and U.S. construction rose to a near 1-1/2-year high in November, lifting hopes that oil demand in the world’s largest consumer will improve.
The market hopes the economy will improve at the same time it hopes oil demand will improve. If that is not irrational and contradictory, I don’t know what is …
Trade in the day – Invest in your life …
