Markets move in cycles. Not every market is the same day
after day. Opportunities exist but in small quantities. In
times of uncertainty, opportunities are even less. We all
invest in conditions where uncertainty is the norm.
Probabilities are the only known factors to decide the
likelihood of success of an investment. But real
uncertainties occur when factors outside the technical
aspects causing the markets to behave erratically. This
comes from news, economic or corporate that are
extraordinary, that influences the markets where technical
aspects are greatly affected. News such as 9/11, subprime
cash crunch, or corporate fraud at high profile companies.
Economic and corporate news are drivers of market action,
bombarding constantly causing emotional and psychological
stress in traders and investors. This stress, in effect,
causes them to act unpredictably.
The most uncertain periods in the markets happen when the
cycles are in the midst of changing, namely, expansion to
contraction and contraction to expansion. In the bull
market, investors become more and more euphoric with
incredible gains until their emotions blind their judgment.
Once the market acts up with outside factors such as
fundamental news, the market begins to sway easily from one
side to the other. This is the period where the losses
begin to accumulate. The investor first starts to believe
the bull market cycle is over, he gets out. Then, in a few
short days, the market recovers on good news; he
immediately gets. A few days later, a conflicting bad news
comes out, the investor changes his mind and sells short or
get out. This period can go for months on end, going up and
down in a range. This is probably where the gains are
completely lost and probably more.
What can investor do? In times where news dominates the
market, it's best to stay out. Why? No one knows what news
and what kind of news comes out and, most importantly, how
the market will react to them. Situations such as sub prime
crisis, economic numbers released are inconsistent. One
day, the numbers look good for one economic indicator; a
few days later, another indicator is released with a
negative number. (i.e. mortgage companies file bankruptcy
while the consumer confidence remains high). Investors are
at the mercy of the psychological and not logical effect of
the market. The masses are swaying back and forth in a
manic-depressive behavior. Dealing with a person with
manic-depressive can be a challenging ordeal.
Let the market figure it out until the bombardment of news
subsides. The market will seesaw, move at every little
news, however insignificant. Highly nervous markets create
tremendous volatility. Good news follow by bad news follow
by good news again will get the investor getting more
emotional. He will only join the rest of the mob in the
market: the losing mob. Most of the investors who are in
the market at this time are losing money, not only their
nerves. This is the time when very little opportunities
show themselves. If an investor intends to hold a stock for
a few weeks but continually getting news in between, the
only certainty is he'll get more news but doesn't know
which way the market will go due to the news. Technically,
the market will look very ugly, a zigzag of prices make
neither head nor tail in the charts. To make sense of it
all, it's best to view the monthly chart to figure out if
the overall trend is intact or not. Try not to view lower
timeframes just yet.
Unless the trading strategy the investor employs require
him to enter the market during this period, he should not
be involved at all. Months of September and October are
usually the most volatile because they tend to be the tops
or bottom of market action. Not only that, these periods
every once in a while abrupt drops in markets, such as 1987
and 1989 market crashes. Unless he's experienced in dealing
with this volatility, it's best to hedge his holdings or
pull out completely and put the money in money markets. He
won't lose money or sleep.
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Larry Swing is the President of the popular day and swing
trading site http://www.mrswing.com a place where you can
find free daily articles and videos covering education,
market analysis and picks from Larry and other well known
traders in the industry.
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