The Stock Market Crystal Ball

As we look through the stock market crystal ball, we see the convergence of technology and bioscience combined with a little nurturing of easy money and low interest rates pushing some stocks higher and higher. Putting a value on this disruptive phase of innovation by technology is nigh on impossible – but it is real, and it is stretching our minds to ‘boggling’ status. Those rising tech stocks dominate the Nasdaq both newcomers and old.

Of course, back-swan events of such as Covid prevent the stock market from getting a free pass to rove higher at its will, but the dawning of this age is a something to respect and be very positive about. We also need to be mindful of the forces of corrections and their effect on the stock market. Covid drew our attention to the effect lockdowns have on economies but is that really what the stock market was focusing on? Obviously not, there is a stronger driving force at the moment.

The stock market is always one step ahead of what we think is the one step ahead. What we think is one step ahead is already a known entity. Known facts, realities and perceptions are always getting built into prices and we should be aware of that.

After all, the stock market was teasing new highs early in 2020, but Covid subsequently put a dent in that market advance. But let’s put it into perspective. Yes, the world has changed but this will pass. Whether other sentiment debilitating events occur is always on the cards, in fact  every 2 years there is a high probability an ‘event’, often unexpected, that has the potential to bring about a 10% decline and sometimes 25%, but that is the reality and we can see what effect they can have. It creates a fear and that’s an emotional distraction from the real forces of the stock market. The Covid scare drove the market down 30% but was followed quickly by a rally of percentage gain yet to play out, based on the combined wisdom of human and monetary forces, depending on what index you want to base it on.

The Australian market has recovered 50% of the fall as at the middle of September 2020 while the Nasdaq has recovered 100% and forged ahead by roughly another 70%. Amazing but this tells us the power of the big US tech stocks and what they offer for the future and this is not just the obvious ones but also the innovation ‘lurkers’. How many more Tesla’s are there out there? The clashing of bio with tech is creating a formidable force.

Our market has recovered 50% to date and that is only with a small portion of contributors. Roughly 25% of the market is strong and 75% in a woeful state. And even in the US which has rocketed through its all-time highs and onwards the occasional bouts of selling have brought about the fear of the ‘next collapse’, but up to now resilient buyers are there to pick of the pieces and drive the market higher. There is a force out there

That recovery in certain stocks this year has surprised us all, except for the systematic models that remain stoically emotionally detached and picked up a terrified and alarmed stock market and propelled it higher generating huge profits for those on the ball. Can we explain the magnificent rallies in stocks such as JB Hi-fi post the debilitating collapse? No, they surprise us all and we accept them at face value because in the end the price doesn’t lie, it never does. So why not profit from it? I can’t think of any reason, and just because I can’t reason it out doesn’t mean I won’t participate. That’s not my game. Reasons often follow a price advance in all knowing fashion or as the sudden awareness dawns on the experts they tell us that of course that’s why it happened. Where we they when they took off?

No model, human or expert can predict a ‘Covid’, but we can assume the propensity for it to occur on a regular basis and in different shapes and sizes that we can never predict. And that’s the heavy mantle we carry into stock market investing. Over time you make money. We love to feel, hope, and think that each time will be different, but it never is. We always want to hope and think (mistakenly) our portfolio of stocks is safe. We get comfortable. An uncannily regular and dangerous state. The stock market lulls us into that false sense of security that’s why the overconfident blow off stage occurs. In fact, every stage of the stock market is associated with ‘moods’ that we can attach to it.

That’s why such determining theories such as Dow theory or Elliot Wave tell us the market moves in certain waves of human emotion and its right. Putting your finger on it exactly is always a mystery and the timing elusive. But it’s the unknowns that are inter sprinkled that challenge us to be able to profit from this ‘moody’ wealth generating machine. It’s also why we can never know exactly what it is the stock market is going to do. What we do know is the stock market hates uncertainty, surprises and the unexpected. That’s when the big reactions occur. The simple effect of a stock exceeding profit targets, but not expectations, can fuel dangerous share price collapses. Especially if expectations are built on hope and not reality.

There is no perfect solution, but most traders will succeed not through analysing a stock to death but using money management under pinned by basic principles of investing coupled with a systematic methodology, and in our case,  it is based on the human psychological behaviour which is momentum based and this is reflected in price action. As Peter Lynch puts it, always know the why and that will tell you what, if not, don’t buy.

To operate a systematic method of engagement you need to be realistic, have good perspective, stay calm, and in control of yourself and your expectations.