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The Predicament Between Gut Feeling and Actionable Intelligence

Here's how to use an opportunity to your advantage

You know that moment when you start feeling like something in in the market isn’t quite right? Maybe it seems like stocks have reached an extreme, or that there is a big event on the horizon, or just a gnawing in your gut that something is due to change.

That sensation is hitting me right now with the SPDR S&P 500 ETF (SPY) up 25 points from the lows and back to the center of last year’s definable range near $205.  It’s the sense that we have gone too far, too fast, and that maybe we only have a few points left before this thing rolls over again.


Do I have any empirical evidence to back this up?  No

Has there been a significant change in the technical or fundamental picture?  No

Have there been any particular warning signs in recent economic data?  No

So basically I just FEEL like we are due for at least a short-term respite to the current upside momentum rather than having any actionable intelligence to back up my theory.

This is when I always remind myself that the market doesn’t care what I think it should do.  It’s the best way of keeping myself out of trouble.  It can continue on its current course far longer than I thought possible and with far worse fundamentals than anyone would believe.

The best way to damage your portfolio is to try and predict exactly when a stock, ETF, or asset class is going to turn rather than simply relying on your philosophy.  Traders should have definable price levels where they will make a change.  Trend followers should have markers that tell them when to adjust.  Others simply buy with steady abandon no matter what the price is at any given time.

If you remember correctly, five weeks ago the world was ending.  I mean literally there were experts on TV and writing articles touting the next bear market, recession, or global crisis.  Credit was collapsing, sentiment was hitting extreme lows, and everyone was telling you to get the hell out.

Now we are back to within spitting distance of all-time highs.  All in less than two months.

The vicious psychology of the markets continues to frustrate those who make decisions based on gut feelings rather than a sound investment philosophy.  You may make a few good calls and a few bad calls, but in the end they will likely cancel each other out and you will find yourself chasing your tail rather than making forward progress.

My advice is to review your decision making process during this last dip and recovery.  Ask yourself how your portfolio performed versus your expectations and what you could reasonably do different during the next correction.   Obviously in hindsight we would all sell at the high and buy again at the low.  However, those inflection points are only known in the rear view mirror, not in real-time.

Use this opportunity to make changes that you feel will benefit your risk tolerance or fine tune your technical triggers.  If you wouldn’t change a thing, then great!  Keep doing what you are doing.

We’ve all had experiences in the market that we regret and there will be cycles that are challenging to navigate.  There is no shame in being wrong.  The only shame is in staying wrong or willfully ignoring obvious lapses than can be corrected.

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The post The Predicament Between Gut Feeling and Actionable Intelligence appeared first on FMD Capital Management.

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