Emotion Rules the Market

Posted on 03/09/2017 10:23 AM

I have written many pieces on market psychology, market dynamics and market expectations. Although the piece below relates to the equity market it applies to all markets including Agricultural. The common thread is all markets are the same, all chart patterns repeat and nothing has changed in the trading world markets are still driven by human emotion. Fear and Greed leave the footprints expectations set the price.


It is the first Friday of any month, you are watching cable television and the monthly unemployment figures come out. They are horrendous. Non-farm payroll has risen by 3% and total unemployment is now at 8.2 %. The newscasters are fueling the flames. The market starts to break; you're thinking, "This is going to be ugly." You sell 500 shares of AAPL. After a brief but violent sell off, the market hits a bottom. It suddenly reverses and rallies for the rest of the day ending up 2.8%.

Let's say you own Google. You have been trying to decide what to do with a fairly large position (for you). Google is about to release earnings. You feel that if Google's earnings are good you want to increase your position. If they are poor you will take your profit and look for a new entry. The earnings are released and Google shows record profits for the last quarter. Google immediately rallies 2%. You decide that this is the signal you needed. You double your position in the market. Over the next three days Google declines by 9%.

This can't be right! The numbers didn't lie, but you got barbecued. Could you have seen this coming?

These FUNDAMENTAL NEWS BOMBS are quite common. The reaction (or non-reaction) of your stock price performance is referred to as "MARKET EXPECTATIONS." No matter what happens to the price after a fundamental announcement, it is only what the market has "discounted" relative to the actual released number that matters. For our purposes the term "market discounting" means that all of the news was really in the market to begin with; the price of the underlying stock has already risen (or dropped) leading up to the release date. The immediate price volatility, after the release, is reactionary. Traders tend to talk about a "Whisper Number," the fundamental measurement (earnings, unemployment number, housing starts, etc.) that the street is expecting to be released. That Whisper Number is usually discounted (baked) into the stock price up to the release date. Typically, a News Bomb occurs when the actual number released is significantly different from the Whisper Number.

In the case of the unemployment number, the STREET really felt the number should have been much higher than the 8.2% that was reported. After the initial panic, selling the "strong hands" started to buy and the market finished on the high of the day.

With the earnings of Google, the STREET felt that even though the company showed record earnings the results should have been even better. After the initial bullish move the "unexpected results" led to a big sell off.

You should always be prepared to REACT to this kind of market (NOT TO TRY AND PREDICT IT -- YOU CAN'T), Many times the market will have left a footprint that we can see in hindsight. More often however, it will be the new price movement that will be our clue. The only way to make money in this business is to learn from adversity. Don't feel alone, every good trader that has lived has had this happen to him or her. As you will learn, your understanding of technical analysis will allow you to prosper in trading conditions like these. In fact you will learn to make profitable trades in any market condition!!!

Keep those stops tight!

The views, opinions and positions expressed by the author are theirs alone and do not necessarily reflect the views, opinions or positions of Pro Farmer.


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