Traders gonna trade

The best piece of daily market commentary I’ve read in awhile is today’s missive from Nicholas Colas, Chief Strategist at ConvergEx, in which he takes an analyst’s perspective of the trader’s mentality…

If you want to know the substance of someone’s character, watch them trade a real-money portfolio for a week or two.  Tell them they have to make money every day and will have their results posted to their Facebook page (if under 40) or on the cover of the WSJ (if over 40).  At the end of that period you will know more about them than their best friends, their spouse, and probably their shrink.  You will know how they cope with loss, rejection, euphoria, regret, praise and every other emotional extreme.  Only golf and high stakes poker come close to revealing a person’s essential character, but you can get lucky on the greens or at the tables for a day.  Two weeks of trading is a much more complete emotional crucible.

Over a few decades in and around trading desks, I have had the opportunity to watch dozens of very successful traders go about their business.  Most of them have a very set process for getting through their day.  They follow it without thinking, even if their personal demeanors are different.  It is sort of like watching a prison movie; there’s the snitch, the boss, the scrounger, the weasel…  But they all know the basic rules of getting through the day without getting killed.

Looking at the state of global equities – and especially U.S. stocks – it is clear that we are in a “Trader’s market”.  I mean that in the old-school sense of the words, as it denotes a heavily rules-based environment.  You can talk Shiller P/Es, Fed policy, ECB policy, Chinese slowdown, and any other 30,000 foot topic until you are tired from stamping your foot, arching your eyebrow and wagging your finger. It doesn’t matter at the moment.

Take, as an example, the old trader’s rule: “You don’t short new highs, and you don’t buy new lows.”  As an analyst, this one always infuriated me.  At the same time it has the odor of ancient wisdom about it, like the basement of an old beach house.  The chance that you possess the marginal information to catch a stock at an inflection point is essentially zero.  Traders know that; analysts tend to forget it.  You wait for the price action to stabilize before you take a position, for this means the market has truly absorbed the marginal investor’s point of view.  Then, and only then, is it time to take the alternative stance.

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Well done, Nick!

Source:

Stuff Traders Have Told Me – May 13th, 2014
Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York