Well, so far September has been a real dud. Dismal. And it’s only got this week to redeem itself. We’re at an interesting place, sitting right on support – is it going to break down? I have had quite a few emails about limiting losses – understandable after the last couple of weeks. People feel their losses much more than they feel a gain of the same size. Illogical, yes, but many experiments show that.
To illustrate this, suppose you are presented with two decisions about profits and losses:
- Decision 1: You have a 100% chance to make a profit of $450 OR a 50% chance to make a profit of $1,000.
- Decision 2: You have a 100% chance to make a loss of $500 OR a 50% chance to make a loss of $1,100.
What decision would you make? You might think that it depended on the person, and that risk averse people would choose the first option and people with a high tolerance for risk would go for the second option. However, that’s not what actually happens.
When deciding between a certain profit of $450 or a 50% chance of a profit of $1,000 people were risk averse. They chose a certain profit of $450 over the 50% chance of $1,000.
But here is where it gets interesting.
Where hey either made a certain loss of $500 or had a 50% chance of $1,100 loss they became risk-seeking and chose the 50% chance of a loss of $1,100.
What would you have decided?
When I first read about the study I went along with the herd, although I hesitated more about the second decision. I was risk averse in profits (who doesn’t want a guaranteed $450?), and then I was risk-seeking in losses (I might not make any loss at all, whereas if I choose the $500 loss then I’m locking in a definite loss.)
Does this have an effect on how people trade? Absolutely.
Investors settle for less risky stocks with smaller profit knowing that they are a ‘sure thing’, hence the emphasis on ‘blue chip’ or ‘quality’ or ‘dividend’ stocks. They don’t want to invest in little startups that, while they may have a chance of becoming the next Apple or Google and make an enormous profit, also have a significant chance of crashing and burning.
However, when they come to selling their investments, it is a different story. When things are heading south there is a reluctance to sell and ‘crystallize’ their losses. Investors hope that the losses will only be temporary, and that it may yet turn into a profitable trade. So, they hang on to their losing investments.
People make irrational decisions, especially in the heat of the moment. When you are under pressure in a losing position, your emotions often control you. That’s why outcomes are better when you make your decisions with a clear head. And that means deciding in advance what will cause you to sell and get out of the market.
If you have a backtested strategy, and know that it will get you out before you make large losses but not whip you in and out unnecessarily, then trust the strategy.
We have dropped right through support at $445, and are resting on support at $430. If it drops through this, we should be getting ready to exit the market. Currently, there is a gap of around $24 between the 10 and 200 SMAs which needs to be closed if we are going to get a death cross, our OUT signal. We started the year at $380, we are now at $430 which is a 12% increase, nice but not wonderful. In July we reached the peak of $458, and an increase of 20%, which was much nicer.
We are not yet in correction territory, which is 10% below the most recent high. SPY has to reach $412 for that. We are 6% below the recent high, but it is still painful.
You always berate yourself with the ‘why didn’t I sell at the top?’ routine and then beat yourself up. Well, I do anyway, even though I know better. But it’s pointless. We are all brilliant traders in hindsight. I will leave the last word on that to Sir John Templeton:
SPYG is also sitting on support, at a level it first reached in early June, which means that we have been going sideways for almost 4 months. Unlike SPY, in September SPYG reached resistance at it previous high of $63 which it reached in July. Since the start of July we have been in consolidation ($59.50 – $63) and as for SPY we will be looking closely this week to see if we bounce off support or drop through it.
QQQ looks similar. It has been consolidating since early June, and is sitting on support at $358. Of you are into chart patterns, then you can see a head-and-shoulders pattern, with the right shoulder higher than the left which is often considered a bullish sign. However, I think the thing to keep our eye on is whether support at $358 holds or the price breaks down. This week should be interesting.🙀
The VIX has turned up, but is still under 20, so technically we are in a low volatility market. It is now at the same level as it was in early August, when the lovely uptrend finished.
I am getting extremely fed up with this – not only am I losing money, but it is boring! I started with $5k.
I can’t help but wonder if my following someone makes them suddenly lose their edge? It always seems to happen. I remember in his book, Best Loser Wins, he said that he had not had a losing day for 15 months (or thereabouts), but look at his results from last week:
Profit: GBP 64,300
Loss: GBP 83,200
Net Loss: GBP 18,900
I will keep going to the end of the month and see how his monthly stats are (his weekly snapshot is below), but I am enjoying it so little I just want to stop right now!
This will be an interesting week – whether good or bad is yet to be seen. All eyes will be on support to see if it holds. At time of writing (11 hrs to market open) the futures are up a bit, so lets hope we are in for a good week. Goodness knows, after last week we deserve it!!
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