We’re in the “scariest” month of the year, and not just because of Halloween. October is the month when the market tends to crash.
Much of the recent disappointment from Washington about the budget showdown and upcoming debt ceiling battle has put traders and investors on the defensive. It’s not hard to see why, especially if you have had a good year. With only a few months remaining in 2013, who wants to lose any ground?
The real question is, should we pay attention to these signals or just dismiss them as useless? My answer: do both!
Here’s an options trading 101 lesson:
Use this opportunity to listen to the markets and take advantage of the less confident, weaker hands who refuse to listen. Several times this year, markets have sold down on an unfounded fear only to bounce back strong. We call that “buying the dips.” With so much interest in the markets these days, every news item becomes a reason to buy or sell; even the media chimes in, believing they are driving price action just by mentioning something.
However, trends are strong and very hard to fight – and they can be tough to join. Imagine trying to get on a fast-moving train when it slows down but doesn’t slow down enough. It’s the same dynamic when trying to go with the market flows. The little jolts of selling and buying offer some great areas of trading if you’re opportunistic. Given the strong gains this year, the heavy skepticism surrounding many events and drivers (see: the Fed stimulus and QE), and it’s no wonder there is hesitation to jump on the trend.
The market speaks the truth; the rest are just opinions. The scare tactics used by the media, pundits, experts and analysts should mostly be ignored. This is the noise that will get you in trouble. Turn down the volume and focus on the trends, momentum and signals in front of you. The market will tell you what direction to move in. Technical analysis is the great equalizer on the spectrum of fear and greed.
