Stock Exchange: Do You Make Up False Market Narratives?

The Stock Exchange is all about trading. Each week we do the following:

  • discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: What Is Your Trading Timeframe?

Our previous Stock Exchange asked the question: What Is Your Trading Timeframe? We noted that that we’re increasingly bombarded with market information, but if the information is geared towards a time horizon different than your trading thesis, it can be irrelevant and a source for error. This week, we take that information idea in a different direction. Not only are we often bombarded with too much information, but sometimes it’s based on a false narrative altogether, or worse.

This Week: Do You Make Up Market Narratives?

We know the media pundits do it, but do you too sometimes make up false market narratives? And is it impacting your trades?

As pondered in this week’s WTWA, why has the market been so quiet? Specifically, after an ugly fourth quarter, followed by a powerful first quarter, it seems the market has been almost too quiet lately.

And perhaps in a bit of recency bias, it also seems many traders are expecting another bout of large volatile market moves. And in the absence of these big moves, the punditry are creating stories to try to stir up some drama (nothing new there). But are you too trying to create false market narratives about why the market has been so eerily calm? Have you left behind your data-driven analysis in favor of tea leaves and crystal balls just to fill the emotional void created by relatively recent volatility episodes in Q4 and Q1?

Trading psychologist Dr. Brett Steenbarger offers some insight into what may actually be happening here with an analogy in his recent Forbes article. Specifically, he follows the story of a playful cat that goes from destructive, to a perfect model cat, and then to a low energy lethargic kitty. In pondering why the cat goes from “good” to “bad,” it turns out it’s the same cat all along, but his environment has changed.

Could something similar be happening with the market? Because of the lack of energy and volatility, are you making up false narratives or diagnosis? And have you gone so far as to allow your personal psychological void to affect your trades rather than relying on actual hard data? According to Dr. Brett:

“In short, the cat’s “personality” was very much a function of his fit with the environment and his overall level of health and energy. Aries’ identity is very much contingent upon his setting and his physical state.”

Model Performance:

Our trading programs have moved back to normal trading and cash levels, after having been holding higher levels of cash in challenging market conditions. And we are sharing the performance of our proprietary trading models, as our readers have requested.

Controlling Risk:

In addition to increasing and decreasing cash levels depending on market conditions, we find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) is helpful in controlling risk; it provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And since many clients combine the trading models with our long-term fundamental methods, they have additional diversity of methods without the need for short-term timing.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.

Holmes: This week I bought shares of IQVIA (IQV). Have you heard of it?

Blue Harbinger: IQVIA  provides advanced analytics, technology solutions, and contract research services to the life sciences industry, Holmes. It also looks like it experienced a significant price drop in the last week. I am guessing that is basically why you bought the shares.

Holmes: It’s mare complicated than just buying anything that dips, but to dumb it down a little for you, yes–I bought on the dip. I am basically a dip-buyer, and I typically hold for about six weeks.

BH: Thanks for that basic info, Holmes. And I am not even offended that you tried to “dumb it down” for me. I know you are a computer based model, which helps you be objective, but not necessarily polite. Here is a look at some fundamental data for this life sciences company.

Holmes: Thanks for the fundamental data, but I am basically into technical data, not fundamentals which are more important in the long-term, but less so over my typical 6-week holding period.

BH: Thanks for sharing, Holmes. I suppose, as a technical model, your objectivity is a strength that prevents you from making up false psychological narratives. Anyway, how about you Road Runner–any trades to share with us this week?

Road Runner: I bought some shares of ADP (ADP) this week. It’s basically a payroll and HR processing company for just about every large corporation in the world.

BH: I know what ADP is, Holmes–thanks. And that’s an interesting buy considering you bought Paycom (PAYC) last week, which is a company that does some of the same things as ADP, just for smaller companies, and without all the fancy (and often very expensive) bells and whistles (plus Paycom offers a more cloud-based solution). I also know that you are a momentum trader, and you like to buy stocks in the lower end of a rising technical channel, and then you typically sell them after 4 weeks. Here is a look at a Fast Graph for ADP, for your consideration.

RR: That’s great information, but not all that info is valuable to me because my timeframe is different. I typically hold my positions for 4 weeks, and then I’m out, so that long-term fundamental data is not all that valuable to me, but thanks anyway.

Athena: I bought shares of Qualcomm (QCOM) this week. What to you think about that?

BH: Are you into semiconductor chips or corporate drama, Athena? Because that’s what this company makes, and what this company has been going through lately, respectively. Here is the Fast Graph.

Athena: I am into technical trades, actually. I am an objective momentum trader, and I typically hold my positions for around 17 weeks. And I am aware and bullish on last week’s news that litigation between Qualcomm and Apple was being dropped.

Felix: I have  a ranking to share. This week I ran the Russell 2000 Index (small caps) through my technical trading model, and my to 20 are ranked in the following list.

Oscar: I have some ETF rankings to share this week. As our resident sector/ETF rotation model, this week I ran our “Comprehensive and Diverse ETF Universe” through my model, and the top 20 are ranked in the following list.

BH: Interesting, Oscar. I see you have the US oil ETF (USO) ranked at the top of your list. Perhaps the US’s new and tougher stance on Iranian oil will shake things up. Thanks for sharing.


There are punditry-driven market narratives everywhere. And when there is some big market-moving event (such as an unexpected interest rate move by the fed) the punditry may actually agree and get their narratives at least somewhat correct. But when there is no big unifying market narrative, the media (and even individual traders) often make up narratives to explain what is (or is not) happening in the market. The risk is that traders buy into these false narratives, and make inappropriate trades based on them. Or worse, in the absence of obvious big market-moving events, traders make up their own narratives, and trade upon them, instead of trading objectively based on the actual data that is available.

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome. Your can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

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