One Question Interview with Brett Steenbarger

July 27th, 2006

Another One Question Interview, this time from Brett Steenbarger. Brett always has insightful commentary on the markets and his response this time is no exception. I did a full interview with Brett a few weeks ago and I took a look at his book recently as well. I’m almost finished with his book (Psychology of Trading) and I’ll be posting some more comments on it soon. (I think it’s a gem.)

Here’s the question for the first round of One Question Interviews:

What trading lesson(s) have you learned from the downtrend that started in May?

Brett:

The move since early May has driven home for me that these are, indeed, global markets. Behavioral finance researchers remind us that we tend to overweight information that is most salient (i.e., that is right in front of us). That salient information tends to be the market we trade and the time frame in which we trade it. In reality, however, the longer-term drivers of market movements are global movements in currency, interest rate, and commodity markets, as well as monetary/economic conditions.

In a bull market, there is a natural correction of upmoves that creates a pattern of higher highs and higher lows. When, however, we get fundamental shifts in the global markets, those natural corrections can result in something longer and deeper. That is what we’ve seen since May, with the rise in global rates, the unwinding of the carry trades that borrowed money from low-yielding economies and parked them in higher-yielding currencies, the risk aversion and resulting drop in emerging market shares amidst evidence of a slowing economy and geopolitical uncertainty, and continued oil price strength and threats of possible shocks.

The lesson since May is that the big picture does really matter. It’s important to track price and volume, but the patterns that work in one market environment can fail miserably when that environment changes.

One Question Interview with Jeff White

July 26th, 2006

To liven things up a bit, I’m introducing a new facet to the StockTickr Interview Series – One Question Interviews. I got this idea from Darren over at ProBlogger. The format will be (obviously) a single question and, like the standard interviews I’ve been doing, I’ll give no limitations on the response length or content (within reason). I’m hoping that these will be more frequent and more applicable to the current market conditions.

I thought I’d start off with Jeff White, a.k.a. the Stock Bandit, who was the first interview we published over four months ago.

Here’s the question for the first round of One Question Interviews:

What trading lesson(s) have you learned from the downtrend that started in May?

Jeff:

I’ve mostly been reminded of a handful of things which I learned in the past, but it’s always a good thing to revisit important lessons. I always try to stay aware of the psychology of market participants, because those emotions largely drive the buying and selling behavior of traders.

Here are 5 lessons that I’ve been reminded of since this downtrend started in May:

Shorts work faster than longs. Shorts work quickly (they call them ‘shorts’ for a reason!). Stocks can fall of their own weight when bids simply disappear and buyers walk away with disinterest. But when you throw a little fear into the mix, some very swift downside moves occur.

Trapped bulls sell into strength once the market tops out. This dynamic can last for a while as many are inclined to sell at the first sign of strength rather than buy. This in turn puts a virtual lid on the market, and it’s why upside has been so limited.

Broken rising trend lines are significant technical events, and it’s wise to take notice when you see that happen. The RUT is a perfect example. Small caps had been making all-time highs and the trend was so solid until the rising trend line broke in May.

Many traders lack discipline. I have seen several people walk away from trading in the past 6 weeks just because they’ve sustained losses in stocks which they refused to exit, hoping for a rebound that never came. HOPE is a 4-letter word, not a trading strategy.

The market won’t rally far without the NAZ. The NAZ has led the way lower, particularly the NAZ 100. Biotechs, semiconductors, and internets are among the most important sectors in our world today, and when those stocks trend down, it significantly handicaps the market. When those three important groups can start acting better, we’ll have much higher odds of a lasting market rally.

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