Why Does the Stock Market Have to “Do Something?”

I often hear analysts and talking heads discuss reasons for the stock market’s movements. Their conclusions are really just a collection of their emotions packaged together to form a result. I have to ignore their commentary, because if I listen too carefully, I may get swept up trying to rationalize the action.

We all know that if there’s too much fear, the market goes down, and if there’s too much optimism, the market goes up. We can see these emotions played out on a chart – and we can also see history.

The numbers on a chart are open to interpretation of patterns, trends and momentum. If you interpret the chart based on human behavior (which never changes), you will have a clue as its next move. That clue helps us understand what’s going on to the right, aka, in the future. History is a great guide.

I bring up this topic as we are at new, all-time highs in the SPX 500, Dow Industrials and Russell 2K and nearing some milestones for the Nasdaq. Some traders have missed all or parts of these upward moves, and that can be frustrating. You’ll never get that opportunity again, will you?

Many players are finding themselves either under-invested or out of the game entirely, preferring to wait till the market pulls back to an appropriate buy point. Patience is a virtue and pullbacks are indeed opportunities, but to make a judgment on what the appropriate buy point is can be misleading. The market is not that accommodating; it prefers to make everyone look foolish in their tactics. Is that how you are feeling if you’ve missed the boat this year? Last year? Since January 2012, when the markets really started to fly?

So, as we contemplate what we should be doing, and as you look at the chart below and hopefully view it with an open mind, understand that we cannot dictate the current or future behavior of the markets. As a long-time market veteran, I have failed on just about every prediction I have ever tried to make, save for the ones that are open-ended (aka, a broken clock is right twice a day).

Those who are predicting a market drop for this or that reason will find themselves waiting for something that won’t likely happen in their time frame. This creates frustration and angst – and even an irrational response to move in when the timing could not be any worse. You see where I’m going here?

Success in trading and investing is not about predicting conditions. It is about interpreting behavior and learning to accept that it won’t likely change; using sentiment tools gives us a leg up to discovering moments where turns are likely – regardless of our biases. We will talk about how to use sentiment and the different tools over the next couple of weeks.