#68 Between Real And Fake — Stock Trading Strategy

Between Real And Fake – Stock Trading Strategy (#68)

There is a saying I’d like to share with you:
“We don’t see things as they are. We see things as we are.”
Perhaps you’ll appreciate the fact that how much we see is influenced by personal or subjective factors. Think about ghosts or extra-terrestrials. Are they real or fake? It’s up to your own belief.

The stock market we see is no exception, especially due to all kinds of misguided information floating around. It is so easy to make a bad decision based on what we see and hear. In order to see better, we must not lose sight of the real fundamental factors no matter which direction the wind blows.

Price
The principle of buy low and sell high governs everything in the marketplace. When stock prices are low enough, the bull will come no matter what. Conversely, when prices have risen to unrealistic levels, the bear will take control.

Example I: In early March 09 when the sky seemed falling, the bull suddenly appeared and took the market to a high level by December. This happened despite the world was immersed in a deep recession.

Index—–March Low 09—-December High 09—-Per Cent Gain
Dow——–6500————10547————-+62%
Nasdaq——1400————2291————–+64%
S&P 500——930————-1128————–+21%

Example II: From January to February 2010, the market plunged quickly within two weeks despite better quarterly earnings, GDP rising by 5.7%, and unemployment dropping to a lower 9.7%.

Index——1/19/2010—-2/8/2010—-Per Cent Loss
Dow——–10725——–9908———7.6%
Nasdaq——2320———2126———8.3%
S&P 500——1150——–1057———-8.1%

It is difficult to tell when the price levels are unrealistically high or low. One thing we are sure, the bull lasts longer than the bear, because the former takes time to build, while the latter is a rush to cash out. Therefore, you have more time to get into a bull market even though you miss the initial phase, but very little time to get out unharmed when the bull says goodbye.

The Market Drivers
The stock market is very complicated. You must appreciate the fundamental driving force. Who are the drivers? They are the big players who have plenty of cash to buy, and plenty of stocks to sell. They also have access to insider information by virtue of their money and high positions. As a result, they control price movements in either direction. Everything else will become secondary when you have a group of dominant players. The problem is that we don’t know what the big guys think and what they plan to do. This is the greatest myth of the stock market. With all the statistical tools employed by analysts, we still have no way to read the minds of the big players

Because the stock market runs on emotions and steroids, market excess cannot be avoided in either direction. That is why we see bubbles and busts and everything else in between. Many people think that the stock price is a result of supply and demand. Really? In fact, the price is auctioned to the highest bidder where the stock can be withheld or dumped by the holder. When a group of big players bid up the price on purpose, demand seems unlimited. When they cash out, supply seems unlimited, too. Therefore, the price you see is a fake, planned by humans. On the other hand, the price is also real because it either benefits or hurts you.

What about the news? Do they move the market? Yes, only on the surface. In fact, the news moves the herd, which comprises millions of small players who are lost but follow the news nonetheless. The big guys do not follow the news. If they do, they are no big guys. They use the news to drive the herd to buy or sell. Sometimes they like to create news through the analysts they employ in their companies to influence your thinking and action.

The Big Picture
The big picture is real but it is seldom clear due to all kinds of man-made confusion. What is the big picture anyway? It is about the economic environment, the business cycle, the characteristics of different industries, consumer demands, and market/product trends. The constant blurring of the big picture is also real. That is what we call uncertainties, which always cause the market to go down.

Why is the big picture important? Remember the saying: A high tide raises all boats. When times are good, even the bad stocks that you happen to own by mistake get a short boost. Conversely, when times are bad, what you buy does not matter because stock prices go down anyway.

You must be able to know where you are in the big picture. Is the economy now in a recession or getting out of it? Is there a bubble right now or just some speculation excess in the stock market? Why tech stocks are more volatile than others? If you cannot answer this kind of general questions, you are nowhere and you will incur great risks in the stock market. Like sailing in the ocean, you must know your direction on the rough seas whichever way the wind blows.

The big picture changes gradually and predictably unless thrown off by major events like war, or natural disaster. Once you are in tune with the big picture, you’ll be able to take advantage of the short-term ups and downs in the market while keeping a sense of direction.

How Right Do You Think?
You must recognize that you think only what you want to think, and see only what you want to see. Basically, everybody is living in an isolated world of his own cut off from the real. However, you can make a better sense of the real world depending on how open-minded you are. In the stock market, the more you open your mind to do critical thinking, the more benefits you are able to reap. To get in tune with the real world, your thinking must be tempered by simple reasoning and logic. Don’t succumb to fantasy or illusion when the real world is unfolding in front of you.

www.stockfessor.com
February 2010

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