Two Emotions Determine Your Success in the Market

There are two emotions in the market, fear and greed.  Markets sell off sharply causing fear in the average stockholder, and, when the fear becomes strong enough, the stockholders sell. This event is what triggers a “bottom,” as there are no sellers left in the market. After a bottom is set, the smart money buys, and rides, the market to the next top, at which point, the average investor feels brave enough to buy stock again. When enough of the public is “bullish,” or greedy, they buy stocks because stocks begin to appear attractive, and this is typically the “top” of the market cycle. If most of the public acted in the exact opposite of what their instincts told them, they would make a fortune. Instead, the average investor repeatedly buys tops and sells bottoms, buying high and selling low.

These same emotions are present in the trading model, that we at California Star Properties reccomend as the market tries to shake out those without conviction. Although rare, I sometimes see a client exit a position if they are uncomfortable, and then, enter back into that same position when they are comfortable, which is usually the worst possible time. Typically, any course of action which makes an investor, or trader, FEEL better has costs in terms of investment performance. The trading model works best when left to do its job over the long term. The S&P trading model is still having a great year with January through April positive and about a 1% loss in May. Although the month is far from over, this month of June is experiencing tremendous volatility with the DOW down about 1000 points and the S&P off over 100 points. These market periods occur, and should happen, to keep all trading models viable. Our job during this time is to monitor the exits. If a trade goes against us, we simply exit. Strict rules are necessary with our type of trading. 

There is light at the end of the tunnel. So far, world markets have sold off much more than the U.S. markets, most likely because our markets are so strong. Gold is selling off and Crude Oil is lower, which should indicate inflation is tapering off, which should, in turn, make the markets more optimistic. In the last update, I mentioned the DOW may try to test 10700, and if it does, the 1220’s would not need to be exited.  Today, the low for the DOW was 10700.93 and we are still holding the 1220’s as the market closed above the exit.  At this support level, a bounce higher at the open tomorrow is entirely possible, but, if there is any inclination of going lower, we will exit the 1220s.  At the time of this writing, the CPI (Consumer Price Index) report, which is viewed as an inflation indicator, will come out on June 14, 2006.  If it is benign then a rally could ensue. With a real monthly win rate of around 80%, and obeying strict exit points, the model has done well over 12 month, or longer term, windows. 

At this time emotions are high because of a great deal of uncertainty in the market.  I’m certain of three things, we have a plan, a model with a track record, and these environments do not last long term.