Trade the Market Like a Stoic Philosopher

The marching bands are standing by, ready to bang out a tune once the S+P 500 heads above its all-time high. We are only a skip and a jump from the 1576 high reached on the 12th October 2007.

If we are at all-time highs in equities that must mean the US economy is also at an all-time high, right?

Well I think we all know the answer to that question. If you have read Markets and Money more than once in your life you know how sceptical I am of the smoke and mirrors they call the equity market these days.

But the fact is the old saying about the market is right. ‘Where the market goes that’s where it is.’ It sounds like a silly statement when you first read it, but when you think about it there is some good advice to be gleaned.

Our perception of the market is not the market. Whether or not the market is a completely fraudulent, manipulated farce (which it is) doesn’t matter. What matters is the price and only the price. We have to play by the rules we are given and there is very little point in jumping up and down when the price action doesn’t agree with our expectations.

Fighting the market is a losing game ultimately. Who is your opponent when you are fighting the market? It doesn’t take too long to work out that you are fighting yourself. The market is always neutral. It doesn’t really care if you make a million dollars or lose your shirt. The battle is always internal. Every skip of the heart as prices move is caused not by the market but by our reaction to it.

As Marcus Aurelius, an Emperor of Rome and one of the great Stoic philosophers, put it, ‘Stop perceiving the pain you imagine and you’ll remain completely unaffected. External things are not the problem. It’s your assessment of them. Which you can erase right now. If the problem is something in your own character, who’s stopping you from setting your mind straight?’

And just to force the point home he also said, ‘I can control my thoughts as necessary; then how can I be troubled? What is outside my mind means nothing to it. Absorb that lesson and your feet stand firm.’

Marcus Aurelius fought battles with the rampaging Germanic hordes in the last decade of his life while he wrote the aphorisms above in an amazing book called The Meditations. If anyone has the right to give us advice on how to cope with the vagaries of life it is him.

I think we all know that it would take a super human effort to remain unaffected by everything that occurs externally from us. We are emotional beings filled with ego. It sounds great in theory to stand aloof from the market and make decisions without an ounce of internal disturbance.

I think the best we can hope for is to understand how irrational we can be in the face of a gyrating market and create as many rules as necessary to place a straightjacket around our impulses.

That is really the basis of technical analysis for me. It is not a crystal ball. It is just a windsock that gives you a hint of the underlying forces driving the market. It helps to create lines in the sand where I can accept that I am wrong quickly rather than relying on hope, which we all know ‘springs eternal’. If you are interested in having a look at a presentation I have done about my trading approach and why I think there are some great trading opportunities coming up. You can view it here.

What I find intriguing about the current rally is that my trending indicators all turned up late last year but I chose to ignore them because I am fundamentally bearish. The feeling that, ‘I am right and the market is wrong,’ is a hard one to shake. The market, of course, is always right.

This then throws up the challenge to let go of all ‘views’ about the market and to rely purely on your technical indicators for all trading decisions. There is no doubt that whatever your view on the market happens to be there will always be a period where the market will make a fool of you.

The bulls get killed in bear markets and the bears are skewered in bull markets, like now. I don’t know of anyone who is bullish in bull markets and bearish in bear markets and constantly gets the shift in trends right. No one.

Most market commentators aren’t traders. They just wax lyrical about the markets and their views but they never say when they are proven right and when they are proven wrong. No targets and no stop losses, just sweeping views that make it impossible to pin them down later for being wrong.

Actually trading the markets is a completely different kettle of fish. Volatility is so intense that you can be completely right about your big picture view, but if your timing is out you lose money. You can get stopped out of a stock and then watch in horror as it turns around almost immediately and heads in the direction you expected.

When that happens should you jump back in? It’s moments like these that no one tells you about before you start trading. The learning curve when entering the markets is immense and really it’s never ending because the market itself is always changing.

The rise of High Frequency Trading (HFT) has changed the structure of price action, perhaps forever if the regulators aren’t willing to step in and level the playing field.

Another factor affecting asset markets is of course the world-wide money printing and ZIRP (zero interest rate policy) of the major central banks.

This is a new world that we live in. How long this game lasts is really anyone’s guess. I think there are many people that know it can’t go on forever but as always it all comes down to timing.

My ‘view’ is that we are close to a major market top, but as I said above ‘views’ aren’t worth all that much. While the trend remains up in the US markets I will just have to accept the fact and be prepared for them to go ever-higher regardless of the underlying fundamental situation.

So get prepared for the headlines screaming that all is well and new all-time highs have been reached in the S+P 500. But don’t believe for a minute that the price of the market is a true reflection of the state of the real world.


Murray Dawes
Editor, Slipstream Trader

Join me on Google Plus
From the Archives…

Gold: The Worst Investment of 2013?
22-03-13 – Bill Bonner

As the Bank Run Hits Cyprus, Dr Cowie Hits Hong Kong
21-03-13 – Nick Hubble

The Mining Shuffle
20-03-13 – Nick Hubble

BHP The Old Warrior
19-03-13 – Dan Denning

Drama in Europe’s Economy: Savers ‘Suffer for Cyprus’
18-03-13 – Dan Denning

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money