The recent move in the Market came as a surprise to many. The NASDAQ has been up by 165 points in a matter of days. The Dow has been up near 700 points. I was admittedly a little disappointed that longer term support (1877 trigger in the Dow) was not hit, but you can see just how meaningful the levels I define are by acknowledging the move that happened afterwards. We missed it by 10 Dow points! Clearly, some might argue that the recent news is dues to earnings. GS, IBM, C, BAC and others all posted solid results. But what now?
Now, I am getting some interesting questions. They are typical for newer members, and for the most part, that is who is asking. "Where is the Market going from here?" Everyone wants to know. This is the resounding question after all. If we knew where the Market is going, we could make great decisions. However, I have an inherent problem with that question. First of all, regardless of who you ask, how sure can you be that they will be right? In fact, how sure do you think they are about their own opinion?
Reasonably, if someone could answer that question and be right every time, he would need to be a psychic. Everyone is wrong sometimes. If your question asks where the Market is going, if you follow it, and the answer you receive is wrong just once, you can lose a substantial amount of wealth. With that, I have a problem with the question from the onset.
Those persons who earn the big bucks do not remain one - sided, and a question about market direction often begs the assumption that they do. That is wrong. The top traders on the street transition with the Market. When they do, they hedge themselves too, because they are not sure, and the risk is not worth it.
Therefore, if we know there is a high degree of uncertainty surrounding the answer to market direction from here, why should we ask it? Obviously because we have been trained to think it is important. Your mutual funds and financial advisors will tell you the market is going up. They will tell you it always goes up, and they will tell you to stay invested. You can bet on that. They only get paid when your money is invested of course. Don't ask them what happened to their theory for the past 10 years, or you might get them out of their comfort zone, but we all know the truth.
The truth is, the Market does not always go up. The truth is, even big money investors do not know where the Market is going. The truth is, the Market is underwater over the past 10 years too. As a result, we all know that we cannot trust an answer to market direction from here, even if it was coming from the Oracle of Omaha.
We are not left out in the cold though. We do have an alternative. All we need to do is change the question.
Instead of asking where the market is headed, we should be asking how we can control our risk. We should be asking about the turning points, and the trading signals. We should ask about them because those are actionable, because they provide structure, incorporate discipline, and allow us to realize opportunities too. The answers to that question are constructive, they can be made with confidence, and they can be followed without attached dire consequences.
This is an example of what it takes to be smarter than the street. All you need to do is shift your approach slightly. Instead of following the masses, who are almost always wrong, think exactly the opposite. Ask the opposite questions. When they ask if they should be buying, you ask when you should be selling. If they ask where the Market is headed, you ask where the risk indicators exist. When they ask if the economy will improve, you ask when it will get worse.
Some of these opposites may seem extreme, but they are an exercise. You are no longer one of the masses. You are elite, and you will survive any recession, every depression, and you will participate in the up trends along the way because your first priority is risk control. It is not about where the Market is going. It is about how we can control our risk along the way. That simple shift is tough for many investors, but those who successfully make the transition to risk control, you will be handsomely rewarded.
Author has no positions in the companies mentioned int his article.