Flexibility in Viewing Leads to Flexibility of Doing

If we look at the same things in the same way, the odds are good that we'll keep doing the same things.  That's great if we have a formula for success; not so good if we're repeating mistakes.  Different perspectives can bring fresh perception, and that can spark insights and new action patterns.

One way I've found useful to gain flexibility of viewpoint is to track measures across different time frames.  Above is a chart of my intermediate-term market strength measure, which is a moving average of the number of stocks in the SPX universe making fresh 5, 20, and 100-day highs vs. lows.  It is much less noisy than shorter-term measures and has done a good job of cresting ahead of price during market cycles.  It is also helpful to see where we stand on the intermediate-term measure when we're short-term oversold.  As you can see, we're not yet at levels that have corresponded to recent market lows.

Still another aid to flexibility of perception is to look, not only at the stock or index you're trading, but an array of related shares and sectors.  It is not unusual to find weakness or strength seeping into leading stocks or sectors that can serve as heads up for more general weakness or strength.  The expansion of stocks making new short-term lows--even when SPX was trading at or near its recent highs--was a great tell for weakness that spread to the general market.

A third way to gain flexibility in perception is to examine markets across asset classes, not just within the asset class you're trading.  A key to understanding recent market weakness has been seeing the rising correlations among a number of macro assets, including oil, high yield bonds, currencies, and stocks.  Those macro correlations are an excellent indication that the drivers of market prices are becoming larger than the dynamics within your particular stock or index.  Earnings for a company may look good, for example, but if global deflationary fears are driving stocks lower, it could be a big mistake to assume that nice earnings will translate into strong upward price performance.

In general, we can generate new views by either looking deeper into what we're trading or by looking broader.  By switching our levels of breadth and depth, we can develop a more complete view of the big picture and spark those "aha!" experiences that lead to great trade ideas.

Further Reading:  Perception and Motivation
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