Letting Markets Tell Their Stories

With booming momentum stocks showing signs of bust, here is some valuable perspective from David Shvartsman and the Finance Trends site.  David's makes an important point:  Nothing goes up forever.  Stocks with a great story but shaky fundamentals are particularly vulnerable to round tripping.

Few problems can be so painful as becoming anchored to a story about a company or industry--or a macro theme--and then failing to listen to the stories that markets are themselves telling.  I vividly recall the attempts to traders to buy dips all the way down in the post-2000 tech meltdown.  I equally recall the pain of those who kept selling rallies in the post 2008-2009 bull market.

One reason I like to follow the cumulative NYSE TICK on an intraday basis is that it tells me when buyers vs. sellers are taking the upper hand and when they are balanced.  On a day like yesterday, when my model forecast was pointing upward, tracking the reversal of the TICK proved invaluable.  All forecasts, stories, and themes are hypotheses:  they are maps, but they are not the territory.  It's the stories told by moving markets that are ultimately important, as they provide the tests of our hypotheses. 

Markets often tell their own stories with relative strength patterns.  Is the market rewarding growth and speculation, or is it rewarding safety and yield?  Look at the recent relative performance of XHB and QQQ versus XLU and XLP.  Clearly, growth is not what is being rewarded.  Similarly, at a global level, you can track EEM vs. SPY or, in fixed income, junk bonds (JNK) vs. investment-grade debt (LQD) or emerging market debt (EMB) vs. U.S. debt (AGG).

How do stocks trade relative to bonds?  How does EM FX trade relative to DM?  Are macro markets reflecting global growth: global slowdown; or idiosyncratic, relative movement?

Bottom line:  by spending too much time focusing on the stories we tell ourselves, we can fail to discern the stories of markets.  Permabears and permabulls are those who have so fallen in love with their narratives that they have become deaf with respect to the market's stories.

Markets are always communicating; so much of trading success begins with listening.

Further Reading:  Listening, Trading, and Emotional Intelligence

No tree grows to the sky and no stock goes up forever, especially those story stocks for which real earnings growth and sound fundamentals are lacking. - See more at: http://financetrends.blogspot.com/2014/04/round-trip-stocks-momentum-booms-and.html#sthash.EVU7PW7S.dpuf

No tree grows to the sky and no stock goes up forever, especially those story stocks for which real earnings growth and sound fundamentals are lacking. - See more at: http://financetrends.blogspot.com/2014/04/round-trip-stocks-momentum-booms-and.html#sthash.EVU7PW7S.dpuf

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