Guarding Against Confirmation Bias

 | Feb 13, 2013 | 2:50 PM EST  | Comments
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Stock quotes in this article:

nflx

,

amzn

,

lnkd

Although I keep yammering about how we should stick with the trend and avoid calling tops I'm finding it increasingly difficult to stay bullish.

The problem isn't the indices, but the action in individual stocks. There are still things acting well like Netflix (NFLX), Amazon.com (AMZN) and LinkedIn (LNKD), but I see too many stocks being jerked around in random fashion.

The question I keep asking myself is whether I am being truly objective in the way I view the market. I have a strong preference for some downside action and I have to guard against confirmation bias. Confirmation bias is the tendency to look at data in a way that supports particular hypotheses.

Many pundits use this approach to the market. They will form an opinion about market direction and then cherry pick the information that best supports that view.  Data that supports a different conclusion are simply ignored. 

No matter how hard you try, it isn't possible to be totally objective about the market. If you trade or invest you will have some bias. I know I am rooting for a pullback because I believe we would have better trading if things weakened and charts had time to set up again.

I find the best way to battle bias is to simply focus on the price action. In the end, that is all that matters and if you are fighting what the market is doing you aren't going to make much money.

Lately the market action had been muted, but still on the positive side. I've been trying not to read too much into that, but the action I'm seeing in individual stocks makes me feel much less positive.

We are hitting intraday lows as I write, which is not a positive development after a strong start this morning. It still isn't terrible action, but there is a shift in the way the market is acting and the price action is starting to tell us to be more careful.

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