The big stock-market headline of 2016 has been the major indices' mediocre performance, not to mention how poor the average stock has done compared to them. But to me, the real story ought to be about market players' attitudes and emotions.
In my 25+ years of trading, I've never encountered so many people who simply hate the market and the way it trades these days. The 2001-2 and 2008-9 bear markets certainly discouraged a lot of investors (for obvious reasons), but the problem today is very different -- too many people simply don't trust the market any more.
Many feel that the action is more manipulated and artificial than ever, which leads them to believe that they can't have an "edge" any more. And when you feel that your efforts won't produce any noticeable results, you give up and look for something else to reward your hard work.
There isn't a big mystery as to why people feel so discouraged -- the market simply doesn't trade the way it did 10 or so years ago.
Instead of the usual human emotions of greed and fear driving the action, computer algorithms, large short-term funds and high-frequency ETFs rule things these days. And what drives all of those players isn't fundamentals, but the hope of gaining an advantage by trading around normal investor emotions.
The end result is that we're seeing a whole additional level of complexity added to the current market. We not only have to understand the psychology of fear and greed that historically drove stocks, but how the big computer-driven funds will try to play on those emotions to gain an edge. If you think in terms of normal human psychology, you'll be on the wrong side quite often. The goal is to always stay one step ahead of simple logic.
A good example of this is the tendency for the market to see V-shaped bounces these days following technical breakdowns.
When human emotions drove the action, we didn't tend to bounce straight back up. Trapped bulls that had suffered painful losses would look for an escape, while aggressive shorts would reload as their greed kicked in. Those emotions would cause retests, pullbacks and a bounce that would proceed in a choppy fashion -- a great environment for traders.
But in today's market, we have a tendency to go straight back up. The computer-driven programs use their advantage of size and speed to produce big spikes that leave bulls underinvested and shorts squeezed.
This create conditions for even more upside action, and soon we have a V-shaped move. The market tends to run away from everyone as the manipulators walk it higher and extract gains along the way.
It's highly frustrating that regulators have allowed this sort of action to go on. There are things they could do to level the playing field again, but the forces that like this new paradigm are just too powerful and are making too much money. This is extremely short-sighted and will eventually cause great pain for the market, but there's little we can do about it in the short term.
What should we do in the meantime (other than complain)?
Simple: Learn how the machines "think," and try to anticipate things the way they anticipate them. Trading has always been about staying one step ahead of other guy, and now we have to go one extra level of complexity and do that.
The big challenge is that this sort of trading makes the market appear extremely random and inconsistent. As my fellow columnist Doug Kass often writes, the market "has no memory from day to day."
That's true because of the way traders think now. Yesterday's action is merely the basis for a new trade today, and it might be totally inconsistent with what you did the day before.
I definitely prefer the good ol' days of trading around fear and greed, but that's not an option. We have to adapt --- and to do that, we have to understand the forces that drive the action now. Once we know who the "enemy" is and what tactics it uses, we can devise a counter-strategy.
I still firmly believe that there are exceptional opportunities for individual traders in this market, but it will require some real effort to prosper these days. (Of course, if the markets were simple, they wouldn't be so potentially lucrative.)
Personally, I plan to attack this brave, new world aggressively in the year ahead. I hope you'll join me in making life miserable for the computers in 2016!
