Sentiment Volatility is NOT a Joke in Your Town

For months I have been discussing on Market Shrinkology and messaging on StockTwits about the high level of sentiment volaitility and how it is a critical compnent of the landscape across equity, options and commodities markets. It is the reason why Steven Place’s blog post this morning on the coming vol break on $BIDU is so timely.

What I Mean by sentiment volaitility is this. The market as a whole is reacting knee jerk style to every bit of news and every gap down open (we’ve had 4 or 5 in the last couple weeks). Participants are riding the tilt a whirl and moving from very bullish to very bearish and back over short periods of time.

For months I have been discussing on Market Shrinkology and messaging on StockTwits about the high level of sentiment volaitility and how it is a critical compnent of the landscape across equity, options and commodities markets.  It is the reason why Steven Place’s blog post this morning on the coming vol break on $BIDU is so timely.

What I Mean by sentiment volaitility is this. The market as a whole is reacting knee jerk style to every bit of news and every gap down open (we’ve had 4 or 5 in the last couple weeks).  Participants are riding the tilt a whirl and moving from very bullish to very bearish and back over short periods of time.

We see this in the AAII Sentiment numbers where the difference between bulls and bears is making double digit moves on a weekly basis.

As I mentioned above, the way to play this, is to buy vol at opportune moments – during the periods of calm between mood swings – as I also pointed out in my post last month on the $XLF before it ran to 15.70.

All this reactivity and we haven’t even had a proper 5% correction on the $SPX since the Nov 5 high close of 1225.

For the record, I dont think the market tops when reactivity is this high on this shallow of a correction and base line state is jittery.

As well, I am usually a vol seller kind of guy but see opportunities as a swing vol buyer as it were.

The Art of War and Trading

Sun Tzu wrote The Art of War more than 2500 years ago and it remains a basic text for those studying military history and strategy.

Its also a great read for traders because it captures the required mindset of a warrior when the game is zero sum. Specific quotes may resonate with a trader and inspire. Here are some that struck me and the translation of the entire text embedded below (HT to The Kirk Report who linked to this pdf a few weeks back):

Sun Tzu wrote The Art of War more than 2500 years ago and it remains a basic text for those studying military history and strategy.

Its also a great read for traders because it captures the required mindset of a warrior when the game is zero sum.  Specific quotes may resonate with a trader and inspire. Here are some that struck me and the translation of the entire text embedded below (HT to The Kirk Report who linked to this pdf a few weeks back):

… the general who wins the battle does many calculations in his temple ere the battle is fought…

It is only one who is thoroughly acquainted with the evils of war that can thoroughly understand the profitable ways of carrying it on…

He will win who knows when to fight and when not to fight

… the opportunity of defeating the enemy is provided by the enemy himself…

Art of War PDF

Let's Be Honest, Wal Mart Washed Our Brains

But Wal Mart wound up engineering the American public to frenzy lunatic fringe style leading up to and then on the day after Thanksgiving. Pulling us about by our opioid receptors until we found ourselves waking up at 1130pm (a half an hour before we went to sleep) to stand in line so that we could buy a tv or laptop or xbox and save a few bucks.

Wal Mart ($WMT) did not invent America’s gluttony.  That saga goes back to the post World War II era, and if you want to get really macro about it, you might say that humans are predisposed, given the right circumstances, to over consumption.

And they didn’t set out to wash our brains. When $WMT began running the Black Friday 5AM Brain Buster Sale some years ago, their intentions were honorable enough in the capitalist sense. They were just trying to destroy smaller competitors proximate to their giant stores by crushing their spirits and bottom line on the most important sales day of the year.

But Wal Mart wound up conditioning the American public to frenzy lunatic fringe style leading up to and then on the day after Thanksgiving.  Pulling us about by our opioid receptors until we found ourselves waking up at 1130pm (a half an hour before we went to sleep) to stand in line so that we could buy a tv or laptop or xbox and save a few bucks.

Theyve conditioned their big box competitors as well to adopt the same behavior and the media who devours the consumption lust drama like m&m’s.

Im not really criticizing $WMT, more turning the mirror on ourselves for reflection.  They’re just running a business and trying to maximize investor returns.

What’s more, and despite such seductive operant contingencies, we are ultimately free to choose our own behaviors.

Let’s Be Honest, Wal Mart Washed Our Brains

But Wal Mart wound up engineering the American public to frenzy lunatic fringe style leading up to and then on the day after Thanksgiving. Pulling us about by our opioid receptors until we found ourselves waking up at 1130pm (a half an hour before we went to sleep) to stand in line so that we could buy a tv or laptop or xbox and save a few bucks.

Wal Mart ($WMT) did not invent America’s gluttony.  That saga goes back to the post World War II era, and if you want to get really macro about it, you might say that humans are predisposed, given the right circumstances, to over consumption.

And they didn’t set out to wash our brains. When $WMT began running the Black Friday 5AM Brain Buster Sale some years ago, their intentions were honorable enough in the capitalist sense. They were just trying to destroy smaller competitors proximate to their giant stores by crushing their spirits and bottom line on the most important sales day of the year.

But Wal Mart wound up conditioning the American public to frenzy lunatic fringe style leading up to and then on the day after Thanksgiving.  Pulling us about by our opioid receptors until we found ourselves waking up at 1130pm (a half an hour before we went to sleep) to stand in line so that we could buy a tv or laptop or xbox and save a few bucks.

Theyve conditioned their big box competitors as well to adopt the same behavior and the media who devours the consumption lust drama like m&m’s.

Im not really criticizing $WMT, more turning the mirror on ourselves for reflection.  They’re just running a business and trying to maximize investor returns.

What’s more, and despite such seductive operant contingencies, we are ultimately free to choose our own behaviors.

Market Shrinology 112310: Interview with Vic Scherer (@DayTrend)

Yesterday, I spent some time with my pal Vic Scherer discussing his path to becoming a successful trader and also the market statistics and persistence lists he compiles on his Daytrend Blog.

Yesterday, I spent some time with my pal Vic Scherer discussing his path to becoming a successful trader and also the market statistics and persistence lists he compiles on his Daytrend Blog.

Market Shrinkology 11/16/10

On last night’s program, I discussed the psychological components of the recent sell off, highlighting those that are most telling including:

1. Blow off technical patterns among market leaders such as $LVS.

2. Rally in speculative names.

3. Extreme bullish shorter term sentiment readings.

4. Poor guidance from a tech bellweather – $CSCO.

Alone, none of these indicated lower prices, though, taken together we are able to formulate a diagnostic impression.  You can watch here:

The Constructivist Revolution and New Media (Revisited)

All one needs to do is log in and consistently over time engage a process of expressing ideas in the present while allowing others to likewise respond in good faith with their own best ideas.

The upshot is that thinkers across an endless variety of subjects who engage might arise and initiate new knowledge systems which are meritocratic.

Along the way, leaders will emerge who have been vetted more purely than ever before.

We are a witness to and a part of a constructivist revolution in which individuals now have the power to define themselves with their best thoughts.

There are a few posts from my old tumblog that continue to get a bunch of hits and, god bless the $GOOG, they look to me like some of the best ones i did. So I figured I would edit them a bit and repost them here on the new blog on occasion. This one is from early 2009 when we were just getting StockTwits going. I read it back today, believe that I nailed it with this post and that it remains very true.

Early psychoanalytic models were deterministic. That is they espoused a view of human nature as being mostly at the whims of forces beyond people’s control whether these forces were internal (needs, desires and conflicts) or external (war. political, socio-economic).

Some of the more recent dynamic models have run counter to a deterministic view. One in particular called constructivism arose out of the cognitive revolution and suggests that humans have much more control over identity development, the ways in which they perceive and act in the world and in turn the ways in which they are perceived by others.

The gist is that we construct our own realities through the narratives we create, the frames we incorporate, the actions we take, the relationships we foster and the ideas we express.

I’m a constructivist in a big way.

I don’t fault the determinists and understand that at the time such theories were built people actually had much less control of their lives due to political and technological limitations.

I bring all this up because I am observing and participating in a revolution based in part on web technologies which promote expression and the sharing of ideas. Many more people than ever before now have the opportunity and the medium to define themselves internally and to the world.

Specifically, I am talking about web based publishing platforms from WordPress to Tumblr to Twitter to StockTwits. People can now take the effort to craft their identity and evolve it over time through the expression of their ideas. What’s more we can do this in a global public space in which others might respond with their own ideas ensuing a dialog which has the potential to inform, inspire, provoke and ultimately foster knowledge and relationships.

Its no small thing that this more powerful capacity to construct, communicate and interact with others across the globe comes along at precisely a moment in history in which centralized idea power authorities are deteriorating. I include in this old guard governments, religious authorities, large media based and other institutions as well as financial institutions.

All one needs to do is log in and consistently over time engage a process of expressing ideas in the present while allowing others to likewise respond in good faith with their own best ideas.

The upshot is that thinkers across an endless variety of subjects who engage might arise and initiate new knowledge systems which are meritocratic.

Along the way, leaders will emerge who have been vetted more purely than ever before.

We are a witness to and a part of a constructivist revolution in which individuals now have the power to define themselves with their best thoughts.

Market Shrinkology November 2: The Mean Reversion Heuristic Revisited

Last night on StockTwits.TV’s Market Shrinkology Program, I went into much more depth regarding the Mean Reversion Heuristic that I blogged about yesterday.

If you found that post interesting, I think you will enjoy the program as I go much deeper into the evolutionary basis of this tendency as well as answer questions from the audience.

Last night on StockTwits.TV’s Market Shrinkology Program, I went into much more depth regarding the Mean Reversion Heuristic I blogged about yesterday.

If you found that post interesting, I think you will enjoy the program as I go much deeper into the evolutionary basis of this tendency as well as answer viewers’ questions.

Hope You Enjoy!

The Mean Reversion Heuristic

You do not need to be a brain surgeon to successfully trade stocks.

In fact, if you gave me the choice of which was more important, intelligence or cognitive flexibility, I would take the latter every time.

Here’s why.

The world around us is filled with instances in which things tend to revert to the mean.

If I flip a coin 100 times and happen to get 90 tails and 10 heads, chances are that the next 100 flips will wind up closer to 50-50.

In nature, most times in which outlier events occur, subsequent events move us back towards the mean.

As a result, humans have this natural tendency to expect mean reversion and to make judgments in accordance with their expectations.

This mean reversion heuristic in and of itself is not irrational and actually serves a useful function most of the time as it saves us the energy of having to make complex calculations in our head. It serves as an efficient mental short cut.

However, it can get us into trouble when we are trading markets.

Over shorter and even intermediate time periods, markets do not necessarily revert. In fact, some of the very best trading situations occur when an asset is strongly trending or when the reversion time frame is so long that it is inconsequential to the current trade or even the next dozen.

This is why traders often have a hard time buying stocks that have already moved higher or are making all time highs. The innate expectancy mean reversion heuristic voice pops up in the back of one’s head whispering, “its moved so far, it must revert, that is just nature.”

So, give me someone who can adapt, someone who is flexible over someone who is a rocket scientist any day because I can teach him to ignore that voice inside his head telling him that break outs must revert.

The mean reversion heuristic is just one more example of how conventional thinking styles that come hard wired in most of us and which serve us just fine in most environments require suspension in the trading turret.

I will speak at length on this topic tonight on Market Shrinkology at 9:30ET on StockTwitsTV.

Talking the Psychology Behind Successful Investing on Your Money Matters Radio

Last week, I had the privilege of joining Marc Pearlman (no relation) on the You Money Matters Radio Program.

This was a special treat as Marc is very knowledgeable in the areas of market psychology and behavioral finance and so he asked a bunch of great questions and just the right challenging ones.

Last week, I had the privilege of joining Marc Pearlman (no relation) on the You Money Matters Radio Program.

This was a special treat as Marc is very knowledgeable in the areas of market psychology and behavioral finance and so he asked a bunch of great questions and just the right challenging ones.

Thanks Marc for having me on! I really enjoyed.

You can listen to the podcast here:

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