Look at the Data and Not Your Fear

Look at the data and not your fear .Right now most of us are passing thru a phase of feeling like a genius in the market. Whether we are analyzing, trading, investing or just giving gyaan, almost everything is coming out right! It is not therefore unlikely that we start to think that our abilities have gone up considerably. I wrote about this aspect in another blog earlier (see Is It LUCK or Is It SKILL or Is It Just the MARKET? ). But today I want to touch upon another aspect.

Among the most heard comments these days is the one about a reaction. Many people I know are waiting for a reaction to buy. Many TAs that I know are readying for a reaction, with several having taken some action on it already (shorted futures or bought puts). Some others have simply exited their longs as they feel markets are unsafe at the moment. So far, the market hasn’t obliged. In the last one month it has added about 400 Nifty points more to the gains, stretching the upward run now to four months. That, in itself, is creating problems for some others- the fact that the market is not behaving ‘normally’. After all, they reason, there has to be a proper ebb and flow in the trend and this unilateral motion upward is therefore ‘not healthy’. As a result of this diagnosis, they have administered their own cure- exit longs or don’t buy anymore or worse, short.

Is there any evidence that a reaction is unfolding? Not a one. Is there any adverse news flow? Not a one. Is there any let up in the fund flow to the market? Not really, as domestic flows swamp the small selling of the FIIs. Is there an overload of long positions in futures? Not at all. In fact the recent rollover data showed that positions had actually decreased! Are stock prices over valued? This is debatable. Some are. But a lot may not be. So, why this obsession with the reaction?

An old saying of the market is that ‘more money is lost waiting for a reaction than in the reaction itself’! What it means to say is that by not participating in the market owing to a fear of an impending reaction, we lose more by way of potential profits not made than we end up losing in those trades that we do take! Inherent within this problem of waiting for a reaction (Godot?) is also the possibility that we may get frustrated and enter late in the cycle. Then we will inflict upon ourselves what we feared the most! How ironical!

In the current market, I believe that is what is happening to a lot of people. Those that sold out (mostly around 9000) in the belief that prices are overdone and waiting to buy back have not got the chance. Those that shorted are getting killed paying the difference. Those that did not buy are getting increasingly more annoyed that this market is running away without them. The worst is, many people known to you are making money- and possibly a lot of it. That is difficult to digest and will often lead to late commitments to the market in a fit of neighbor’s envy!

In all the cases as above, more money is being lost by being away. What is the worst that can happen? Your last set of trades would get kicked in the teeth, right? OK. Take that loss. But why are you foregoing all the possible profits that can be made by being in the market as it continues to rise? Only fear of a reaction is keeping you from participating. Look at the data. And then look at the fear. It is quite clear what you need to do. Put your head down, stick with the trend; participate; avoid adventure; and, watch your quantity- don’t go over trade because of the sentiment.

This is the solution for the current market problems with data. It is not more discussions with similar minded friends about why you both agree the market HAS to go down. It is not about finding new facts that will point it to going down ‘anytime now’. It is going to go down when it is ready to do. Why do you want to decide when that is? Your job is to participate. Do that. Leave the rest to the market.