Stocks have lost their early energy, but breadth remains positive, and there is a little green on the screens. It is slow, random, and uninteresting, which makes it a good time to contemplate the Pareto Principle.
The Pareto Principle is more commonly known as the 80/20 rule. 80% of results will come during 20% of the time, while there will be little progress during 80% of the time.
This rule applies to many things, such as 20% of criminals commit 80% of the crime and 20% of drivers cause 80% of all traffic accidents, but it is particularly important in trading since many market players don't appreciate the lumpiness of their results.
Traders would like to produce consistent and steady profits, but that just isn't the way the market works. The big returns usually come during a short period of time, and then we will sit around and make little progress most of the time. The market conditions that are most supportive of big returns only last a limited amount of time. We had a great illustration of that back in January and February when traders were buying new Lamborghinis and even tractors with their profits, but for months now, we have been on the downside of the Pareto Principle when little progress is being made by most traders.
The good news is that if we stay patient and vigilant, we will once again have a good run when the 20% works in our favor. However, for now, this is just one of those times where treading water and staying even is a worthwhile accomplishment.