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Has The Stock Market Changed?
In our weekly reports we look at, and forecast near term as well as long term prospects for the financial markets using Elliott Wave and Fibonacci support and resistance analysis.
These tools are superb for getting a feel for what to expect over coming weeks and months, as well as preparing us mentally and emotionally to deal with probable market changes. It is
always better to be prepared, than to be caught by surprise.
But forecasting is not the same as "knowing." This is why we use "price" to tell us when the markets are trending, and to make our buy and sell decisions. For more on price, see last week's commentary "A Closer Look At "Price"".
Remember that the vast majority of investors try to "forecast" the markets. They "react" to news events, a multitude of indicators, and the emotions of fear and greed. They buy
because they believe the markets are going higher. They sell because they believe the markets are going lower.
At FibTimer, we "use" the changes in price, which are generated by the buy and sell decisions of the majority of investors, to make profitable market timing decisions.
Trade The Market, Not The Forecast
There is a time honored saying, "trade the market, not the forecast." But the truth is, very few follow this excellent advice.
Knowing the vast majority of investors are "followers" who are swept up in the current emotions and trade "with" the current trend makes all the difference in the world.
Profitable traders do not make money with forecasts. They do not make money by being followers. They do not make money by allowing their emotions to
guide their buy and sell decisions and they are not swayed by news events nor the advice of others.
Profitable traders make money by trading with a plan (with clear entry and exit signals) and basing trading decisions on changes in price. If price is trending higher, the odds
favor continuing higher prices. If price is trending lower, the odds favor continuing lower prices.
Why do trends continue? Because we know most investors are "followers."
And this remains true until the trend changes. No one knows how far any trend will go, so betting against it is a fools game. Smart traders "stay with the trend" until it ends.
We do not want to be part of the "mob mentality." At FibTimer, we step back and look at what the mob is doing, and use this information to profitably time the markets.
This brings us to the subject of this commentary, "It's Different This Time."
Is This Time "Really" Different?
The current market rally is notable for its refusal to correct. It just keeps powering higher. Every time some selling hits the markets, buyers step in and
hand the sellers their heads.
Morning weakness is almost always followed by afternoon buyers taking advantage of slightly lower prices. This is typical of buyers being influenced by their emotions.
Every day more money is finding its way back into stocks as word gets around that "easy money" is being made.
Volume is increasing and the emotion "greed" is growing stronger and stronger. Investors are again talking stocks around the office water coolers. My barber is starting to watch
the financial news channels again. The last time he did this was in early 1999.
When investors finally believe "it's different this time," they will be buying with complete abandon.
That is when this rally will end.
Can we know ahead of time when that day will occur? ...No.
In fact, no one knows. We will know "after" the trend reverses and "price" begins to drop.
Then and only then will our trend indicators tell us to reverse to bearish positions. If it happened any sooner, we could easily find ourselves on the wrong side of the market
as it continues higher.
Trends usually last much longer than anyone expects. That is why we wait for the trend to change, before we make changes.
The Greater Fool Theory
Those investors who power the latter stages of a market rally truly believe "it's different this time." When the top occurs, volume will likely be huge. In fact it will be huge for days
prior to the top. All those believers ferociously buying.
This is also known as, "the greater fool theory." As long as there is a "greater fool" to buy a stock at a higher price than you paid for it, you are a winner.
As trend traders, we know greed will empty the pockets of the true believers. They will hold their positions after the markets begin to decline.
They will hold them after they begin to feel concern. They will hold them after they stop listening to the news because it scares them. And then
they will sell when the emotion "fear" is too overpowering too ignore. That, of course, will be a market bottom.
This is what always happens to those who believe, "it's different this time." Over and over, year after year, decade after decade.
Profiting By Knowing How The Majority Will Act
At FibTimer, we "use" this information to profit.
We know the multitudes will follow their emotions and buy far past when it is safe to buy. That is why we never second guess
an advancing trend. One can can never know how far the emotion "greed" will push "prices" higher.
We also know the emotion "fear" will then cause these same losing investors to sell at bottoms. Again, we never know just how far that "declining" trend will go,
so we stay bearish (or in cash) until it reverses.
Trading trends is the only sure way to profit over time. The markets trend because investors trade with their emotions. That will never change as long as
free markets remain free. It is never "different this time."
Recent articles from the FibTimer.com market timing services;
A Closer Look At "Price"
Investor vs. Trader...Which Are You?
The Other Side Of The Trade
Market Timing And The Presidential Election
Let Your Profits Ride...Rules For Successful Market Timing
Critical Issues For Market Timers
Disappointment And Regret
Job Search: Market Timer Needed
Discipline and Market Timing
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All Rights Reserved.
FibTimer reports may not be redistributed without
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable. |
