The Anchoring Problem
Quick question: what did you pay for your first car? I’ll bet you remember. Mine cost $430 (it was a long time ago, and it was a gutless wonder.). I’ll bet you remember what you sold it for too (unless it fell apart, like mine). But what did you pay for your second car? Third? Harder to remember, isn’t it? Why is this?
A Significant Event
Buying your first car was probably one of your first grown-up events, so you remember it vividly. It was important. Just like buying a stock; parting with real money is a significant event so we tend to remember what price we paid and attach an ‘anchor’ to it. But is this anchor a good thing?
Sunk Costs
Does the anchor stop us making good decisions? Or is it a mental reference point that can skew future judgements?
This is a trap (called the ‘relativity trap’) that many traders fall into. Even when facts have changed, the anchor holds them in place.
Although with ITM we are not buying individual stocks, anchoring still plays a part in our view of the market – and can influence our decisions if we let it.
The Anchor Point
There is a tendence to anchor to a fixed point in the market like January 1st, the 2024 peak, the 2023 low, the last 6 months. We all know that finance journos must get clicks so they choose an anchor point that gives the most dramatic so that people will click to read it.
Which Headline?
Here are 4 headlines about SPY using different anchor points that today are correct:
Ø UP 12% OVER THE LAST YEAR |
Ø UP 20% FROM ITS LOW |
Ø DOWN 2% SINCE ITS HIGH |
Ø UP 2.5% THIS YEAR |
Which is going to get the most clicks?
Buying at the bottom . . .
Doesn’t happen. Only in fantasies (we’ve all had that fantasy). Just like selling at the top – it doesn’t happen either. Market commentators tend to assume that everyone has bought at the bottom and sold at the top. I can’t count (correction: I don’t want to count) the number of emails I have had berating me for not identifying the top and advising people to bale out. And quite a few for not identifying the bottom and advising people to buy.
Anchoring the golden cross
Whether we like it or not we have an anchor in the golden cross. What is important is to make sure that it doesn’t cloud our judgement. We know that we hang in there until the death cross tells us to get out. ‘I’ll wait for it to come back up to my buy price, then I’ll get out’ – how many times have I heard that?
Waiting for Godot
Let’s say you were watching Lehman Bros at $86, and it dropped to $58. A bargain! You buy. It drops some more. You wait for it to get back to your selling price so you can get rid of it without taking a loss. A year later it is worth 12 cents and clearly never getting back to your buy price.
ZOOM? Remember how it was the market darling during covid? Trading for $559? You bought – and are still waiting for it to get back to your buy price. Its now $60. You may be waiting a long time.
PAYPAL? Also a market darling after covid. You bought in at $308. It’s now $60 – but, hey it will get back up, then you’ll sell!
Self-delusion is death to traders. (But here’s the funny thing – I actually thought of abandoning ITM and shorting both these stocks. They were lauded as ‘the way of the future / the right side of history / all the catchphrases’ so I thought they were sure to crash. And don’t get me started on Tesla. . . .)
Trade the Market, Not Your Memory
Avoid the relativity trap. Focus on the present. The market doesn’t know and doesn’t care when you bought in and at what price. The market does what the market does.
Anchors are gut reactions, not rational analysis.
Letting them go sharpens decision-making and allows you to focus on what is actually happening.
Yes, I am pontificating again.
Here endeth the lesson.
To the markets
Things are looking more hopeful, but maybe that’s because we are getting used to the rumours and overreactions. Let’s check the charts.
SPY Charts
SPY appears to have broken out of its Darvas box – which is good news. The volume is consistently above average so that is another good sign.
However, it is bumping up against the 600 mark which may prove to be resistance as it did in November last year. In the months that followed SPY struggled to get much above that level, reaching a high of 613 in February.
You can see that in January and most of February the volume was less than average meaning that there was not much bullish conviction in the market. The increase in volume started when the market was dropping, which is what usually happens as people react fearfully and sell their holdings.
The golden cross is still clearly in force, so no action needed.
On the weekly chart we see that the bounce is still continuing, but there is some way to go before we are back to the uptrend.
SPYG Charts
SPYG is approaching its previous high of just over $92, and we will have to wait to see if this forms resistance. Apart from that, the chart looks fine, and the golden cross is still clearly in force.
On the weekly chart we see that the bounce off support is well and truly confirmed, and that SPYG is now bumping against the 2023 uptrend.
QQQ Charts
I have made this chart a bit wider for context. You can see the double top in December last year and February this year – and QQQ is approaching that level again. Apart from that the chart looks good, with the golden cross clearly confirmed and still in force.
The weekly chart is very similar to SPYG. It shows the bounce has been confirmed and QQQ is now trading right on the uptrend that started in 2023.
VIX Chart
ITMeter
The week ahead . .
Inflation figures are due out this week: the CPI (consumer price index) before market open on Wednesday, the PPI (producer price index) is probably coming out Friday. Both will be scrutinized for clues about what the Fed are likely to do at their next meeting on 17-18 June.
The futures
The futures are pretty neutral, 5 hours to market open.
This blog coming to you from . .
Scotland. Its raining. Surprise! So, I can’t show you any of the beautiful scenery. But it’s boring reading about someone’s perfect life – more fun to read about things that went wrong. And on the last night in Paris, they certainly went wrong.
I had always wanted to go to Maxim’s (restaurant) because it was in so many novels. They are usually booked out, but on Monday they weren’t. So off I went, all excited.
Hmmmm . . .the first bad sign was you had to queue outside while they checked everyone in. Not very glamorous, but I was willing to overlook that. The inside was just as I had imagined – a mix of belle epoque and art nouveau, wonderfully atmospheric. And then . . . .
The whole place started to shake! An earthquake? No, Maxim’s is right over the metro, so every time a train goes by the whole place shakes and rattles. Quite disconcerting. The tables were so close together they had to move them every time they seated someone.
Someone got on their knees and proposed (not to me!), so general hubbub. The couple on the next table spent the entire night on cell phones. The music was too loud (92 decibels!). The food was pretty average. The crepe suzette was burned.
All in all . . . it was a very expensive night, and not particularly enjoyable. But at least I have now dined at Maxim’s.
Fingers crossed for a good week!
Heather
Trade the tide, not the waves
14 Responses
Dear Heather,
Thank you for your weekly as always. Please stay safe in Europe and Scotland. I am thankful and grateful that President Trump and his administration is restoring law and order in Los Angeles and cleaning the city and making it safe for the World Cup of 2026 and the Olympics of 2028.
Sincerely,
George Henry
Hey George!
Just left SCotland today – and it stopped raining and started sunshine. Dammit!!
Re World cup etc – I’m afraid I don’t have the sporting gene, never watch it – not even sure what the World Cup is (rugby? soccer? tennis?)
However, I have noticed that whoever hosts the Olympics tends to suffer financially. Its not the cash injection that politicians think it is.
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h
My first car was a 1967 Camaro convertible and paid $300. Sold it the next year for $800 and thought I was a genius. Now worth way over $80,000 and not looking like a genius anymore lol.
Hey Jamie – too funny – mine was a clapped out ford anglia – and I just saw that the average price for that model is $24k, with one fetching $$55k.
Unfortunately, mine went to the knackers yard!
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h
Nothing to add to your essay about anchoring. It was really brilliant and something I wish had been pointed out to me twenty-five years ago. Your enthusiam for the market is infectious! Hope you enjoy the single malt in Scotland.
Hi Bill – thank you!
It’s funny, I have an idea, start to write, and then it just flows, although sometimes I think I am haranging everyone!
And yes, I love the market – can’t go a day without checking in on it and trying to work out what is happening.
Re single malt – I actually hate whisky – mainly because growing up in Scotland any time you were sick they gave you a ‘hot toddy’ so I got to associate scotch with feeling ill and can’t drink it. It’s probably saved me a few hangovers!
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Hi Heather, I hope this message find you well. I have a question regarding the ITM strategy – since the golden cross appeared approximately three weeks ago, would it be too late to enter the position at this point?
Additionally, I would like to receive your emails. How can I subscribe to your mailing list?
Thank you!
HI Raquel – no, it isn’t too late, but you won’t get the same results as people who bought in at the golden cross – but if we are in for a nice bull it will probably make minimal difference. If you wait for a new golden cross you may be waiting too late.
I’ve covered this in a previous blog at the start of the last bull, here’s the link: https://heathercullen.com/is-it-too-late/
Re the emails – I can’t see you on the database (but could easily have missed it) if you don’t get the monday blog update alert then just fill out the contact form again and you will be on it.
Hope this helps
h
Great commentary! The naysayers are just you’re standard dumb…!
Thanks Heather!
Thank you Andrew! Apprecieated!
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h
My anchor…. 450.00 plow, 100’ of over 1 inch chain and 300’ of inch and a 1/2 of rope tied to my 37 foot sailboat… lost one night in New York. One never forgets their first anchor. One also never forgets their
“ Father’s “ favorite stock quotes…
• buy low and sell high•
r
Hi Randy – the funniest story i know about anchors happened to freinds of my parents – the wife was trying to tell her husband that the anchor wasn’t fastened, and he said exasperatedly ‘for goodness sake woman stop arguing and throw it’ – so she did! It still makes me laugh.
I’ve never owned a yacht so don’t have any anchor stories of my own!
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h
To all the naysayers: it’s relatively simply to call the top and call the bottom – IN HINDSIGHT. The traditional Golden Cross is 50/200 crossover, some use the 20/200 cross. The 10/200 Golden Cross has been backtested from SPY’s inception and clearly outperforms. It gets us in much earlier and out much sooner. You can’t beat it. Chill out and follow the ITM strategy.
Hi Michael – yes hindsight is a wonderful thing. It all seems so obvious!
But, yes, the 10/200 cross beats the 50/200 and 20/200 – I’ve tried all the different combinations, and it is the best.
But its easier to follow ITM when things are going up – not quite so easy when the market is going down!
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