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Why Sentiment Changes So Quickly
Earlier in my career, it used to take about 2-3 months for sentiment to change from being bullish to bearish (and vice versa). Now, it feels like it only takes about 2-3 weeks. Here are some reasons why.
1) We have so much information in real-time, especially our account balances. Years ago, people used to get monthly or quarterly statements from their brokerages. Now, everyone has their net worth available on their phones in real-time. This constant watching of balances and overkill of visibility is leading to higher levels of emotions. In addition, there are so many bloggers out there, multiple financial networks, and endless social media platforms inundating us with a lot of noise. They mostly promote fear because that’s what gets the views and keeps the ratings high.
2) We live in the most impatient world ever. Most people do 10 sit-ups and complain that they don’t have washboard abs. In the markets, most people want to make $10M in two days.
3) Because of this impatience, people are using A HUGE AMOUNT of leverage. Leverage includes options, weekly options, 0DTE options (over 50% of the options traded every day expire by the end of the day), futures, leveraged ETFs, options on leveraged ETFs, margin, and aggressively large position sizes. Therefore, when the market has a normal pullback, too many people get wiped out. Also, this isn’t just occurring with retail traders. Many institutions are using insane amounts of leverage as we have seen recently with the yen carry trade.
4) We live in the weakest generation of people ever. If this offends you, then you are one of them. This week is a perfect example. The same people who complain that the Fed is interfering too much in the markets were screaming for an emergency rate cut on Monday because the market was gapping down 2-3%. This overall weakness leads to extreme levels of fear very quickly when, most of the time, it’s just a normal pullback for the markets.
I will be discussing this in more detail this week on The Compound and Friends podcast and will post this link here after the recording becomes available.
I can be reached at: jfahmy@zorcapital.com.
Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained on this blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned on this blog. The stocks presented are not to be considered a recommendation to buy any stock. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.
Market Note to Members (7/9/24)
HERE IS THE MARKET NOTE I SENT TO EDUCATIONAL MEMBERS TONIGHT.
I tweeted that I reduced my equity exposure today and I received many emails asking me questions. The first main question is “why?” No one ever needs to justify locking in some profits. The simple answer is I’m up nicely to start the quarter and I just wanted to lock in some gains while things are a little extended. Remember, I always discuss knowing your timeframe. My active style of investment management isn’t for everyone. Not everyone has the time to vary their investment levels, nor does everyone have the mental capacity to make decisions in the market. I don’t say that to be mean, it’s just the truth. As always, don’t copy me or anyone else, and please continue to work on your OWN plan.
The second question has to do with fear. Some members tell me they get scared when I call for pullbacks. I have several responses to this:
1) Never trade from a position of fear. I always encourage “calm and confident” trading. When you’re scared, you will likely make bad and emotional decisions.
2) I could be wrong. That’s why I said I reduced exposure. I didn’t move to 100% cash! If the market continues to grind higher, I will likely participate. I’m just trying to reduce volatility for clients in case we pull back because I have a portfolio of concentrated positions. Again, this style is not for everyone.
3) I’m not calling for a crash. Just a normal pull back over the next 3-6 weeks down to the 50-day moving average. I think President Biden will drop out of the race soon and that announcement will cause uncertainty in the markets. I don’t think it will be a big deal, but we could see a kneejerk reaction and it could give the market an excuse to correct modestly (approximately 3-5%).
4) If a 3-5% pullback scares you, then you shouldn’t be in the market. I’m sorry, but that mentality is weak. You’re probably scared because you’re using excessive leverage. Trust me, I’ve seen it happen too many times when the market pulls back 5% and people lose 25-50% of their portfolio. If this has happened to you, then you might want to reconsider how you use leverage.
5) Do you just expect the market to go up every single day? Have you ever studied price action? Has the market spoiled so many people that we’re now entitled to gains every day? Again, I’m not cheering for downside, nor am I calling for anything major. I’m simply saying that a pullback would be normal, especially considering all the call writing on many Mega Caps for August and that August is traditionally one of the weaker months.
Again, stop living in fear and stop being so impatient. No matter what your time frame is, get strong entry points and manage your positions as best as possible. Thank you and good luck!
I can be reached at: jfahmy@zorcapital.com.
Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained on this blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned on this blog. The stocks presented are not to be considered a recommendation to buy any stock. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.
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