Listen to what the market is telling you
Today's Financial News - Posted April 23, 2009
The markets are more efficient than most investors believe. By the time news hits, it is already discounted and the profit opportunity is gone. Unless you have a crystal ball, the only option is to understand the market’s noise.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is a tough environment for the so-called casual investor. With government activism running rampant, financial crimes and corruption erupting all over the place and a seesawing market that refuses to pick a trend, even the notion of investing can force the average guy into a head-pounding anxiety fit.
But building wealth and protecting a portfolio does not have to be a nauseating experience. If I had to pull just one nugget of learned wisdom from my experience running a popular trading service, it is this one: Do not eliminate the noise, take advantage of it.
Noise is all over the place these days. Whether it is Jim Cramer yelling sell, sell, sell. Or Rick Santelli calling for a tea party. Or President Obama spreading the word “crisis” like it was the new theme of some evangelical movement. You can’t avoid it.
As short-term options traders, we absolutely love using this noise to our advantage. But we have to be quick and have the ability to endure a moderate level of risk.
Fans of Eugene Fama and his Efficient-Market Hypothesis will understand the term semi-strong efficiency. Followers of this theory believe the markets are entirely efficient at properly weighing and valuing publicly disclosed information.
In other words, the instant the information is made available, share price will reach its fair value. If investors make their move after that “instant,” they are acting too late.
That means the only way to consistently beat the market is to accurately “predict” the upcoming moves or to take advantage of investor bias.
Since I was not born with a six-sense and have yet to buy a crystal ball from a passing band of gypsies, I have worked to hone my ability to filter the market’s noise and use it to my advantage.
When salesmen like Cramer, Santelli and Obama shout about the economy or upcoming moves, do not take their word at face value. Remember, the markets are efficient. The loudmouths do not know (with the possible exception of Obama) anything the market has not already discounted.
But they are a fantastic source of noise. They help sway the market’s biases. Study enough of this noise and the momentum trades they create and you will be able to greatly increase your ability to accurately predict the market’s action.
Become financially literate
Every night, I drive home from the office with tired eyes. When I got to bed at night, my pupils are still wandering from left to right and from top to bottom as if they are trying to read ghost words scrolling across my weary eyelids.
Smart investors spent every chance they get reading and studying the market and the noise created throughout the day. The rumors, the trends and the plain-old conspiracy theories are what drive trading profits.
The unemployment report, the housing report, CPI, PPI, oil inventories, all that stuff is discounted long before you and I ever read about it. Even by the time it ticks across the board at the CBOE or the NYSE, it has been traded on and deciphered.
So what I am offering you is no set-it-and-forget-it tip. There is no silver bullet that will knock out winning plays time after time. But it can be done with hard work and dedication.
Take in all the information you can and build upon your past experiences.
The CFA Institute calls a variation of this idea the Mosaic Theory. But its scenario includes non-disclosed insider information. Chances are you do not have access to this information. And if you do, you shouldn’t be trading on it.
Even so, the basic notion holds true. Take in as much information as you can and trade based on the knowledge you gain. The noise of the market is what is going to create the next profitable move.
Read, understand and then read some more. Know what the markets are doing and why.
Fundamental analysis and technical analysis are still vital weapons in a successful trader’s arsenal, as they will provide the foundation for proving your assumptions. But force me to choose just one tool to manage my entire portfolio, it would be the noise of the market.
Don’t tune it out. Use it for all it is worth.
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