Over Reactions, Exaggerations and Chronic Short Termism

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I’m expecting this to be a short Blog - partly because it shouldn’t take much text to extol the theory but also because it is 10.40pm on a Saturday night that I am starting on the First Draft and I am running behind massively and I don’t want to be here into the small hours scribbling - although tonight there is the advantage of the Clocks changing so we gain an extra hour. I would prefer to spend that snoozing though…..

The topic here is that when an Asset makes a big move lower or higher (sometimes a move higher applies but I find it is far rarer - probably because the Media prefers bad news stories over what could be seen as a good piece of news), I tend to find that the Financial Media and then the Mainstream Media seem to latch onto the Story and give it huge publicity - but the real bit I want to focus our attention on here is that at the same time we often get some ridiculous Forecasts about how low or high the Asset will go.

The easiest way to show this is to use some examples - try these for size which I came up with fairly quickly from memory:

• Early in 2016 we had the collapse in Oil Prices and this got immense Media coverage and lots of excitement and hype. Probably around the Peak of the excitement and Media Frenzy, we got a few Predictions that “Oil is going to $15” and similar crystal ball nonsense. The funny thing is that at the time of these Frenzies our Emotions get spun around and psychologically these kind of extreme Targets don’t actually sound all that implausible. I also remember CNBC late one night having a Charting ‘Expert’ (I had never heard of him so no doubt he was a ‘Talking Head’ dragged in to feed the narrative) coming up with some bilge along the lines that Oil was going to $10. In the event, Oil went down to around $29 at the low.
• Back in the 1999 Dotcom Boom Frenzy I think there was a book which came out with the title something like ‘Dow 40,000’ - again, at the time of heightened excitement and ‘Irrational Exuberance’ this probably sounded not too daft. Today the Dow Jones Industrials Index is just below 18.000 and this is near an All Time High - so the Dow got nowhere near even half of this massively exaggerated 40,000 target.
• Here is another Oil example (but this time to the upside) - back in 2012 the Oil Price got very excited and touched a Peak of about $128 - at the time I remember everyone getting all excited and there were loads of ‘Experts’ predicting $150 and I think there was one outrageous one saying $200. Now Oil is around $50.……
• There has been huge focus on the Quid recently with the Pound against the US Dollar dropping down to a Low around 1.19 on the recent ‘Flash Crash’ and it is currently around 1.25. I am seeing predictions of 1.10 but are these just an extreme in a time of Media (and Political due to Brexit) focus and excitement? If you have been reading my Weekly Charts Blogs you will know I have been looking closely at this Currency pair.

There is something that might help to explain these Predictions which with Hindsight tend to look rather silly. It might just simply be the Psychological Concept of the ‘Availability Heuristic’ - my thinking here is that most likely at any point in time there are all sorts of crazy and extreme forecasts being thrown out by various ‘Experts’ and Analysts etc. - but in the normal course of events they just don’t get any attention, publicity or focus. However, in the heat of the Battle Frenzy of an extreme move, maybe these kind of seemingly crazy predictions do appear relevant and the Media picks up on them to add to the Story and heighten the Excitement and Emotion around the yarn.

I guess the whole point of this Blog is to bring Reader’s attention to this kind of thing and whenever we hear such predications maybe we should remember where this kind of thing has happened in the past and we should take a step back and think calmly and rationally about how likely such extremes are. I will concede that it is not simple to extract ourselves from the Emotional Torrent but at least by recognising how these kind of Crazy Targets get thrown out into the Mass Media perhaps we can at least have a chance of keeping our Common Sense and not getting all caught up in the buzz.

I find that the best way to deal with such Macro type moves is to ignore all the arguments and theories about what is driving the Price and to focus instead simply on the Chart - what are the Trends, Candles, Indicators, Moving Averages, Support & Resistance, etc. telling us?

An Unrelated, Related Matter
There’s something else I wanted to mention and it’s only a quick point so makes sense to shove it at the end here. I have noticed with the current US Election and also with the Brexit Vote how the Markets obviously knew these fixed Dates were coming but they didn’t actually react until we were right on top of the Dates - it was maybe even just 1 week or so before they did start to react.

This has particular relevance for me because I tend to think Strategically and plan ahead for such events, but the danger here is that it means that in practice I have tended to put on Short Hedges too early - so next time we have something like this I need to leave it until quite late - maybe a fortnight before or something is the time to be thinking about getting Short and/or Selling Stock (moving into Cash and Lowering Leverage). Once we get to this point in time I should then watch the Charts closely for Indications that it is time to Sell.

Conventional Wisdom (which may be wrong yet again !!) seems to be that Markets look ahead 6 months (someone suggested to me recently that maybe they look 18 months ahead even) but I am starting to wonder if this is totally wrong - from the recent experience of some Major Events, it is clear that the Market is remarkably Short Term.

Anyway, that’s something to mull over……

Cheers, WD.