Bottom Picking Is A Dirty Business
Just a quick note to wish everyone a Happy Independence Day. The current market environment has the bulls feeling more like Independence Day is a re-run of the Will Smith movie, complete with alien invasion and rampant destruction.One thing to keep in mind is that predicting bottoms is really easy. I mean, it’s super easy. Just predict it. Bam, you’re in the game and you’ve time-stamped your prediction.
Here’s the problem with that — if you’re predicting it in your own portfolio and acting on that prediction, you’ve just bought more risk than you can imagine. Sure, you might be the new Nostradamus and bottom tick the market. But the more likely scenario is that you’ve caught a falling knife at a level other than the bottom. And that implicates your discipline and nerve. If the market keeps running against your “prediction”, at what point to you privately throw in the towel, confess your sins, close your positions, and survive to make another prediction?
That’s just not good trading, because it’s the low probability trade, and speculation is all about probabilities! Trends go farther than most rational folks believe they will. Why? Because the market is not about rationality. Malkiel proved that in his seminal tome, “A Random Walk Down Wall Street.” I was in New York earlier this week and bought a hot dog from him as he randomly walked his food cart down Wall Street.
Bottom Line: The market trends at times…it is not random. And the end of a trend will typically be marked by irrational behavior — the lowest common denominator will be excited and will act in irrational ways. There is really no way of “predicting” the end of irrational behavior. Sure, you can glean a lot of information from price movement, volume, interrelationships with the broader market, with bonds, with news events, etc. But irrationality evidences the weak link in human behavior. Accept it…Embrace it…and Respect it. Doing so will save you money.
And if you’re predicting a bottom for the public forum (as we tend to see folks do on CNBC and other media outlets on a very regular basis), this is a great time to do it. Sooner or later, we will see a bottom. The conditions are ripe, with the broader market deeply oversold, and various oscillators and indicators flashing “Danger Will Robinson! Danger Will Robinson!” The “bottom” is close. But what’s a bottom. Is it a short-term bounce, or a more meaningful “BOTTOM”? Conveniently, that is something that most pundits omit in their predictions. Rather, future data will dictate what the prediction actually was…with the appropriate clarification in a public forum. Chest pounding and loud voices will remind everyone of the accuracy of the prediction. But here’s the problem with that: During the interim between the prediction and the ultimate bottom, there are many gyrations that shake out viewers and readers who place faith in (and base actions on) the prediction. Now, everyone needs to own their own trades — that’s a given, and anyone who disputes that probably has Jim Cramer’s email and blames him for every stock they buy which does not provide immediate rewards. Own your trades! Cull ideas from any viable source. Don’t be an original thinker — it will rarely make you money (unless, of course, you truly have superior intellect and intelligence. But that’s a characteristic of very few people, and admittedly group that I’m not gifted enough to be a member of). Instead, strive to stick with the crowd, but have the presence of mind self-confidence to know when it’s time to step off the train and leave the crowd. They always go too far, the extent of which only becomes apparent through the perfect lens of hindsight.
Rather than spin your wheels trying to predict a bottom, focus more on identifying a bottom. Take Justice Potter Stewart’s approach to defining pornography: “I’ll know it when I see it.” That works for traders, because you put the odds on your side. You forget about being there right at the bottom. When you continue to pick the bottom, it tends to result in discomfort and irritation.
Instead, focus on these things: Focus on waiting for a high volume reversal day off a big intraday move down. I mean, a BIG intraday move down, with a very high intraday range. Be aware that this type of day might occur in response to a big earnings number or some economic data…or it might just happen because it happens. But you’ve got to see some puking going on, with big chunks flying in integers rather than the orderly process we’ve been seeing, where any little rally is met with liquidation. That kind of grind is tough to trade because, again, the conditions are ripe for a big reversal! So making a big commitment before those conditions are present is fraught with risk…because those conditions just might arise after you’ve made that commitment, resulting in a shake out right when you should be making the commitment.
Even when you see this kind of move, be a trader…not a true believer. Confine your faith to your church. Confine your hope to your 2008 politics. But bring your objective, rational, respectful nature to trading, where the ultimate respect is given to your trading capital, and your rational nature give you the insight and patience to understand that there will be ample time to put your money to work after THE bottom has become apparent. Only the little zigs and jigs require immediate action, and those have limited upside.
Be patient. Wait this out and let others make their predictions. Frankly, these folks don’t really matter do they? They don’t matter at all when it comes to the thing that counts the most — the only thing that counts: Your Trading Account!
Nice move higher today, but don’t be fooled. Until proven otherwise, this little rally is nothing more than a little rally. Perhaps it is the result of fat and happy sellers taking the day off. Perhaps it is the result of short covering (though I’ve always been suspicious of this oft-stated reason for a market lift because short sellers make up such a thin sliver of the market participants). Perhaps the buyers will come for stocks on Monday. But perhaps they won’t. Sure, the pervasively oversold market (and the S&P Short Range Oscillator was at -10 yesterday…a level that I’ve never seen as long as I’ve been tracking it) makes the conditions ripe for a bottom. But oversold markets can remain oversold, just like overbought markets can remain overbought.
Strive to identify the bottom. Let others be bottom pickers.
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