Overnight, Asian markets pushed the S&P futures to a new all-time high of 1694.25, putting us in spitting distance of 1700. There is something about round numbers that makes people want to reach them. While new highs also mean profit-taking, which we’ve seen, there is an equally strong bullish sentiment, of traders eager to join the rally and party like it’s 1699.
Sure, there’s a chance that the market will just pick up where it left off on Friday and rally through this Monday, especially now that the July contract has expired and people are focused. There’s a chance it will be as simple as buying on a pullback, riding out some drawdowns, and taking profits in the afternoon. Those who are long may get lucky.
However, good traders don’t rely on luck, but the work of emotional control, money management, and designing a good trading plan that includes an exit strategy both on the winning and losing side. Luck does not figure into a good trader’s calculations. Having learned from great traders, including MrTopStep’s Danny Riley and Brian Shepard, I actually get a little nervous when I get lucky. It makes me wonder whether my plan would have worked without that luck.
Too often the notion of being a lucky trader infects people’s minds and they start to adopt the gambler’s mindset. Not Kenny Rogers’ Gambler, who said “You’ve got to know when to hold ’em/and know when to fold ’em,” But the attitude of the sucker who walks into the casino feeling lucky, forgetting the one truth of every casino: the house always wins.
As we make new highs, we’ll hear a lot of breathless talk from the people with nice hair and teeth on TV, trying to explain why the market is still rallying even though [fill in the blank]. People fill that blank with all sorts of reasons why the market shouldn’t be so happy, as if happiness had anything to do with it: Unemployment is still too high, gold is no longer an affordable safe haven, oil prices are sky-high, Obama is still president.
They’ll also come up with a lot of reasons why the market should be rallying–as though the market ever asks for our permission or approval. The collective is sure of one thing always: that it knows better than any individual member of the collective. Nevertheless, a lot of airtime that no longer gets filled with the latest trial or scandal will go to explaining why the market is rallying. Reasons like, unemployment is still too high, but we’re in our 24th straight month of job growth; gold is not tempting traders away from stocks; high oil prices mean big profits for energy companies; and Obama is still president.
As citizens, as journalists, as amateur students or professional scholars of economics, it’s important for us to think about the reasons why. It’s important for us to realize that stocks and GDP have gone up after every increase in the minimum wage. It’s important for us to know that a new Glass-Steagall Act will not end banking, only reckless speculation by banks that should be done by investment and hedge funds. It’s important for us to know that global warming is real and not only the biggest danger to our species, but the biggest economic opportunity of our time.
But as traders, we must resist the urge to play pundit and say why something should happen as a result of something in the news.
I don’t mean fundamental traders are wrong. Fundamentals are important even for self-proclaimed technical traders. But the best use of fundamentals is to help decide how the herd is likely to respond to news. That helps you decide whether to intelligently go along with the herd’s move, stay out, or prepare to trade the reaction, when the herd resumes the trend.
Think of a cowboy driving a herd of cattle, who sees a lightning storm ahead. He knows the lightning will spook the herd and they may stampede unless he controls them and gets them to a place that will contain their movements. He doesn’t speculate about what caused the storm. He doesn’t speculate about why cows are afraid of lightning storms.
And if they do happen to panic and run, he certainly doesn’t ask the cows why they’re running. The answer would probably be, “Don’t ask me! I’m just chasing those cows in front of me and trying not to get poked by the ones behind me.” Economic behavior is often like that.
So when the market is moving, especially with the kind of crazy, frenetic energy we’re likely to see both upwards and downwards this week, it’s best to ignore the hype and idle chitchat. Keep your wits about you and trade like great traders do: by doing the work.
Remember, the only truth is price. Everything else is just fancy-sounding guessing.
Or to put it another way: don’t be one of the herd. Be the cowboy.