In my humble opinion, I gave a great pep talk on the topic of not having an edge in stocks today. I did so using a third-person narrative, using Average Joe investor as an example.
My conversation was based on a link I was passed this morning: an article about the disappearing edge in financial markets.
http://www.traderplanet.com/commentaries/view/164682-the-dr-is-in-the-case-of-the-disappearing-edge/
Not the best article I’ve ever read, but the subject struck a chord with me. More so now than I can ever recall in my career, but my biggest edge I’ve come across in the last 5 years has been Average Joe, and what a great indicator he is.
I’ve tried to explain to traders I coach or have spoken to over the years, that the market has become a sophisticated instrument that can sniff them out from the rest of market participants, and literally screw them out of their money. This is because they are an Average Joe.
Before I move too far ahead, its obvious that the market has become something that is was never intended to be. Rather than be a place where a company can go to raise cash via debt or equity and individuals can take ownership in a company that offers them a good investment opportunity, its become a videogame, where the kid with the fastest internet connection wins. The rise of the machines makes this a playground for algorithms and high frequency transactions. While we have access to information now in ways that we’ve never had before, but even still, the playground isn’t exactly level for Average Joe.
I try to incorporate market/investor sentiment in the bulk of my ideas. Take the Apple trade, which if you heard me diagram what it would look like two months ago, it would blow your mind today. Take the post on UNXL, which pointed out the only real reason I took the trade was investor sentiment. Remarkably timed too, might I add.
Average Joe is predictable. He buys high, sells low. He waits too long to buy, he sells to early. He’s bearish at bottoms and bullish at tops. He waits for markets to run forever to give him confidence, he holds on too long and capitulates at bottoms. Average Joe is the antithesis of financial markets.
Yesterday, just prior to the close, we talked about housing stocks. The reason why is that they led this breakdown in stocks. Yesterday, the ITB broke the neckline of a multi-month reversal pattern, and sure enough, there was a tremendous amount of volume as the breakdown occurred. Average Joe sold some builders yesterday.
At the close yesterday I discussed that this chart would be the tell as to whether or not there are bear traps lying about, and that if builders rallied, KBH was the best prospect of the group.
Sure enough, housing stocks rallied hard today, right in the face of a 225 point washout in the Dow. If the ITB is a market tell here, then tomorrow it would make sense to see stocks open a little lower, then rally hard off the lows in the same manner that the ITB did earlier today. I would assume housing stocks wouldn’t participate much either, as that ITB is sitting right on the neckline of its reversal pattern.
In short, Average Joe might capitulate into further weakness tomorrow morning. This would make for a decent short term dip buy in stocks.
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