By Amram Margalit – Leverate
On Thursday, September 20th 2018, the S&P 500 Index hit a new record high, and as soon as it did, the naysayers crawled out of the woodwork. “It’s too high…it can only go down from here!”. So, whither goest this runaway stock market train?
Any technical trader who earned their living buying and selling any financial commodity in the 1980s would probably recall the name J. Peter Steidlmayer. Steidlmayer’s claim to fame was inventing a statistical trading technique called Market Profile, which enabled financial market traders to identify market strength and direction building up over time. This technique used half-hour time packets that were mapped onto a bar chart indicating whether a market was moving or consolidating, and it was very popular at the time.
One of Steidlmayer’s other pearls of wisdom was that when markets made new highs—you bought! Just think about it. Someone out there has bought something at a price where it has never traded before. What should that be telling you? And, of course, the inverse applies to markets making new lows—don’t fall into the trap of thinking, “It can only go up from here”. New lows mean: Sell it!
While such contra-intuitive reactions may seem to be psychologically, and fundamentally ill advised, the facts speak for themselves. Markets reach new highs not because there are more buyers than sellers, but because of the “aggressiveness” of the bulls outpacing the waning commitment of the bears.
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Of course, market direction can change at any time, and no trader should be so bold, or arrogant, to suggest that a trend will continue forever. But, the trend is always your friend, and while you’re on the right side of it, you should stay with it. It’s a bit like surfing. You find a wave, jump on your board, and you ride! You have no idea how long the run will last, but you stay with it for as long as you can. And you certainly don’t jump off just because you think it’s been going on for too long.
It’s almost laughable how houses like the great Morgan Stanley or CSFB should come out with predictions of market direction months into the future. Yes, they have their fingers on the pulse when it comes to market data, but they cannot predict the future of the potential financial, social, or political upheaval to come. They just can’t, and history proves this to be the case. Who could have predicted the Arab Spring? Or the rise of Donald Trump? Or the visit of North Korea’s Kim Jong-un to the White House?
Fundamental and technical analysts jump on the bandwagon when markets reach extreme highs or lows, and the best advice is just to ignore them. As long as you are performing your own analysis, preferably following chart patterns and simple computerized statistical analysis, you will call the market correctly at least five times out of ten. And, providing you are following sound money management principles, such as cutting your losses short, then you will make money in the long run.
About the Author:
Amram Margalit is a professional writer who has worked in a wide range of settings, including technology companies, nonprofits, and the entertainment industry. Within these positions, Amram has provided quality content and advertising services and is currently the Content Manager at Leverate.