Trend Shift or Overreaction?

Should we be glad about this shift in momentum on the downside? Some headlines are calling this a correction, but technically we have sold off three percent from the highs and that isn’t really a correction, but nonetheless, should this be an event we welcome with open arms? In simple psychological terms… no. We all want the market to trend higher as it fits the profile of investing overall. We don’t even mind the simple swings down when it happens without fanfare and headlines. But, when it comes with the doom-and-gloom of the media it makes managing money stressful. Many went home Friday with a renewed stress of what is going to happen looking forward. The challenge with that is no one really knows and any guess is purely speculation. What we can do, is manage the what if’s of the market and react accordingly.

In my post on January 23rd, I discussed this issue relative to managing your expectations or beliefs about the market looking forward. Friday was a perfect example of being ready for the unexpected relative to your beliefs. We were looking for earnings to be the catalyst to the downside, but it was China and the emerging markets which provided the catalyst toward selling. Either event gave the same result of selling and meeting our initial expectations. However, now we have to manage the move based on this being a news event (temporary reaction) or a trend changing event (permanent reaction). The results either way, we hit some of our stops and raised our cash levels heading into the trading week. If you wanted to be more aggressive in your approach to the outcome you could have sold long positions and opened short trades, but that would have been better suited if the trigger event was in line with your beliefs (earnings causing the selling). Either way the belief became a partial reality on Friday. If the selling continues it will create more of a reality relative to what we believe going forward (trend change). Equally important, you have to now manage the expectation as it unfolds. Entry into new positions and the management of those positions. The process never stops unfortunately as managing money is a day to day function of our believes versus the markets reality. When emotions enter into the decision process the stress builds and too often bad decisions result. Step back relax and let this unfold… remember your disciplined approach.

From my view stress in managing money is a result of not having a plan or strategy to manage the process as it unfolds day-to-day. Once you build the plan the market will take care of itself and you will take care of your portfolio with good habits and a simple approach. Remember, there is no single way of managing money correctly, there is only what works for you. The rest is an exercise in debate, and that isn’t worthy of our time during a decision making period. Debating strategy is better left to when you are relaxed with nothing to worry about over a beer. Equally changing your strategy mid-stream is never a good idea as emotions tend sway your thinking.

Thus, the answer to the question, should we be glad about this downside move or reaction? That depends on your belief and you strategy for dealing with the current market environment. From my perspective, trend changes or shifts are never fun, they are work. You have to transition your mindset from positive, in this case, to negative or downside focused. Those transitions are not easy and will be challenged by any bounce or upside movement in the broad markets. It is much easier to manage money in a trending market than a market that is experiencing a trend shift or change. The change is where you need to take time and let the new trend establish itself without the fear of being wrong or missing the opportunity. The only change that has taken place thus far is a micro trend change (0-13 weeks). The longer term trendlines are still in play and must be respected versus ignored. This is where your strategy and timeline for your positions comes into play. Know what you are looking for going forward and as it unfolds you establish your positions accordingly. Not until.

It is impossible to cover the process of managing money and emotions in one simple post. I will add more to this as we advance through the week to hopefully share some insight into the thought process of managing money through trend shifts and market reactions. Buckle up, this is about to get interesting.