Trade Alert: Flip the market psychology script

What do you know, a down day in the markets in 2019? Who’da thunk stocks could go down?

I’m doing a little nibbling in the hedge fund on some of the existing names in the portfolio, including Twitter, Verizon, Facebook, Google and Amazon.

No rush, just nibbling and what not around the edges.

Here’s a question that’s been on my mind for the last week or so. Does market psychology work in 2019 like it did in decades past?

That is, I’m thinking that the algorithms, hedge funds and market markers are zeroed in on manipulating the psychology of the active trader. For the last few decades, at least, active trader was using charts and sentiment to game the psychology of active money managers and the general public. Every chartist and active trader has been trying to game a pullback this year in large part because you’d expect people to use the rally to catch their breath and lock in the pop. But the relentless market rally has foiled the technical analyst chart reading as the charts have kept getting extended almost every day in 2019.

And maybe that’s by design. The algo’s and 21st century market markers are flipping the script. They made the sell-off last last year harsher than it otherwise would have been, foiling all those chartists who kept buying at “support levels.” And now they’ve made this year’s rally go longer and farther than the chartists thought possible.

I’ve long used my poll about Who’s more scared right now, the bulls or the bears as a way to gauge sentiment when markets get to extremes. For years, whenever the markets were getting crushed and the results of the poll would come back as nearly 100% “Bulls are more scared” — well, that was usually a good sign that the markets would be about to rally and vice versa when the markets were going straight up and the results were all “Bears are more scared.”

In the last year though, I haven’t been able to get an extreme reading on that poll. Maybe that’s also a sign of how normal psychology/chart reading/technical analysis/sentiment indicators are no longer as useful as most people wish they still were.

What does work? Finding Revolutionary Investments, being cool and patient waiting for good valuations and set-ups, homework, hard work and finding good asymmetric risk/reward opportunities. Let’s stick to that part of the script.

Disclosure: At the time of publication, the firm in which Willard is a partner had positions in some of the stocks mentioned above although positions can change at any time and without notice.