Markets Look Forward- Where Are You Looking?


Markets Are Counter-Intuitive In Nature

If you were living under a rock for the past 7 months (and cut off from everything that has happened this year) and asked where do you think the market will be and only shown these headlines:

I’m sure I’m missing a few but here are a few “big” headlines that come to mind:

  • GDP fell -2.9% in Q1 (even with the Fed printing billions of dollars every day)
  • Earnings Blah
  • 3 Freak Airplane Crashes: 1 disappeared, 1 was shot down, and 1 crashed in the desert
  • US housing market has stalled
  • The Fed is tapering QE
  • Israel launched a ground offensive in Gaza
  • Ukraine imploded and a piece of it joined Russia
  • The IMF and the other large organizations have downgraded the global economy
  • US & EU launched a series of sanctions against Russia  
  • European Central Bank took historic measures and took rates into negative territory to stimulate their lackluster economy
  • The small-cap Russell 2000 index is down 1.5% in 2014.

Fact vs Fiction:

Where do you think the S&P 500 is trading?
Up 7%
Down -10% 
Or Flat (unchanged for the year)?

Here’s Why Most People Lose Money On Wall Street:

The vast majority of people surveyed would choose down and some might choose flat. Very little if any would choose up. Meanwhile, the S&P 500 is up +7% this year and flirting with new all-time highs! That is why it is extremely important to trade on what we see happening and not on what we think will happen.  

Why Does This Happen? The Market Looks  Forward, Not Backward:

The reason why this plays out time and time again on Wall Street is that the human mind focuses on the past, with very little focusing on the future (let alone a positive future). That is the key difference- everything mentioned above has already happened or still happening but does not reflect what will happen tomorrow. This is one reason why so many investors have trouble with fundamental analysis. They look at the company’s earnings, sales, p/e ratio, etc but then have a very hard time making money trading the stock. The primary reason is that the market looks forward, not backward. So next time you buy or sell a stock ask yourself, am I trading on what I see happening? If not, you might want to think twice about making that buy or sell decision. 

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