Rev's Forum: You're Not Kreskin; Stop Trying to Predict Market Moves

 | Sep 09, 2016 | 7:44 AM EDT
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"Life is 10% what happens to you and 90% how you react to it." --Charles R. Swindoll

Many market participants believe that the key to market success is the ability to predict the future. If they can figure out what is going to happen next week, then they can make the appropriate moves and produce huge gains.

That sounds like simple logic, but it can be a major handicap to think that the market is about psychic ability. In fact, the inclination to focus on prediction can put you in a very deep hole if you are stubborn about a certain market scenario developing.

The present market is a good example. We have had a historically narrow trading range for about two months. There has been a slight positive bias but if you have been anticipating a big move in either direction, you are treading water at best.

There is mistaken assumption that the market is rational and that if we just apply hard, cold logic we will be able to predict what will happen next. It is ego and self-deceit to think we are smart enough to know what the market is going to do. No one -- and I mean no one -- has ever been able to predict market moves consistently with any great degree of accuracy.

Some folks get lucky now and then and make a big call but make no mistake: it is luck. That doesn't mean that market pundits are incapable of providing us with market insights. Many are very good at alerting us to the possibility of a shift in the action, but none are very precise with the timing.

If we can't predict what is going to happen next, then what should we do? That alternative is to be extremely vigilant and react as conditions change. Rather than formulate some sort of thesis, simply watch the price action. When it changes, adjust the approach.

Currently we are in an amazingly tight trading range but with excellent action in individual stocks under the surface. Some folks believe that a correction is coming and they are sitting on the sidelines waiting for it. They have missed fantastic trading as a consequence. Any edge they think they will have by anticipating is more than eaten up by the profits they are missing.

Sooner or later they will get lucky and the market will do what they hoped but, in many cases, they will still be far behind the less astute market players who didn't anticipate and just stuck with the market as long as possible. A long trading range tends to push us to be more anticipatory. We know that it has to resolve itself in one way or the other soon and it is human nature to try to predict. Rather than play that game, simply manage the stocks that you own. They will tell you all you need to know. When they are acting poorly, move aside and let the market tell you what to do.

This morning we are looking at a negative start due to disappointment over the ECB's rate announcement yesterday. This sort of disappoint typically doesn't last long but the bearish thesis this time is that poor economic news is no longer a positive market driver. They may be right but rather than guess, let's see what the market has to say.

Stay reactive my friends. When market conditions change, then we will change.

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