As someone who for the last decade has built trading systems and advised over 20,000 people (a week) on stock market timing signals, our goal is to bring an agorithmic view on the markets to individuals.
Most people get their views on the stock market from news that they hear on TV or some internet portal. This issue with this is that news doesn’t drive the market. News satisfies our brain’s need for reason. Reason resolves uncertainty, which is a fear. It doesn’t matter than the reasoning is right. What matters is that the average investor believes it is.
So what’s this have to do with stock market timing signals? Very simply, we are not wired to be good market timers. Our brains are wired to make us feel good or certain about a certain outcome.
One solution is math and numbers. But those too are also subject to subjective interpretation. Trust me, two people can look at the same set of figures and reach two different conclusions. I spent 22 years in commercial insurance, where numbers drove everything – and saw this every day.
Throw in the fact that the world is a much more random place than most of the population can comprehend, and then you wonder why would anyone want to time the stock market… I ask myself that every day
Because periodically, ineffiencies in how money is positioned in the market, aligns with events in the market place, and causes dramatic moves. I’m not talking about a black swan type event. For the odds of catching a black swan type of event are so low, that you could design a system to make you very wealthy in the event we get one, however, odds are you’ll give up on the strategy because the pay off could come in several years, and even thought the payoff would result in a decade worth of profits, it’s not how we’re wired to receive rewards.
When I talk about how we’re wired, it’s as much focusing on how our brains responds to rewards, inline with how our primary motivating factors like the desire to obtain pleasure and the stronger need to avoid pain motivate 99% of all our actions. Studies have shown that we’ll do much more to avoid pain, than to obtain pleasure. If you’re not sure what I mean, watch a commercial sometime – every good marketing person plays on giving people pleasure, or helping them avoid some pain…
Now back to us humans and stock market timing signals, let’s look at some data from my morning article to clients:
Just to frame this image, it’s from the CBOE data, and it’s positioned to look at 5 an 13 day moving averages, which capture roughly 90% of most market moves.
Periodically this indicator can reach extremes. It’s coming off one now. And in the past, a high reading has resulted in market sell-offs.
Forget about the news, the only other event that matters here is that last Friday was options expiration. Expiration is simpy the third Friday of every month – and for the most part trading is emotional or algorithmic, but this (like the last and first day of the month/quarter, although less so) is a calendar driven event, meaning you have options that expire on a certain date and you have to act by or on this date.
That may cause some pinning of price action. And it’s why reversals in the stock market, periodically can align with options expiration.
So put it all together and while I’m bullish and long this market here, I am issuing a red flag of caution to my clients that on any sustained bearish price action, we’ll likely move into a sell signal and position short the market for a couple weeks, as the energy in the markets can sustain that level of a move.
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Investment Research Group, Inc.