Since it is a Friday before a 3 day holiday weekend, its a good time to kick back, thinking about what the recent market action might mean.
• Most Day-to-day market action is noise, There is very little signal involved, with the vast majority of commentary after-the-fact rationalizations of what just occurred.
• Over the years, one of the few exceptions that I have found is the IntraDay reversal. After a long move in either direction, followed by a big flip can be worrisome.
• I do pay attention to days like Wednesday that start out strong and end weak. The caveat: All bets are off on FOMC minute days, as we seem to have a big spike in volatility (someone must have done a study on this).
• Consider a day that starts out 150 Dow points up (or down) and ending the day down (or up) 150. That 300 point swing is more significant than a down (up) 300 point day. We sometimes see it at major tops and bottoms, as it reflects an exhaustion of one side in the battle of supply and demand. (Candlestick technicians have the data on shooting stars and dojis; if this interest you see Steve Nison’s book Japanese Candlestick Charting Techniques).
• Of course, all of this can reflects your biases, holdings, fears and worries. That is why I try to think about issues such abstractly, and referencing current positions. Otherwise, we encounter the problem that markets can serve as Rorschach tests, reflecting peoples pre-existing investment postures, not what they truly think.
• Bears see the intraday reversal such as Wednesday as a very significant change in tone; Bulls see a comeback such as Thursday as proof of a Japanese overreaction to weak China economic news, that was not applicable to the US.
• Lately, it seems that markets close the day much stronger than the early morning futures would imply. I’d love to see the actual data on that (Closes vs AM Futures). It is similar to what used to be called the Smart Money Index, something created by Don Hays. (I have no clue if SMI has any insight).
• My key takeaway is that the cognitive bias is immense. Most of the attempts we see to interpret short or even intermediate term market action are often overwhelmingly filled with rationalizations of existing positions.
• So much of what we have learned from the data is counter-intuitive. The most challenging thing confronting the vast majority of investors is their inability to make objective, emotion-free decisions based on empirical data. Instincts, hunches and emotions are killers when it comes to the markets.
Source: The Big Picture