The Market of Experts, Noise, Contradictions, and Finding Sanity

In the bearish market regime, we are currently in, it is very common for every beginner trader and investor to turn to the news for expert opinions on what is going on in the market and what to expect. A big question everyone has is, "When will the market bottom?"

So the experts on the news probably know it all, right? But what we get from the news are just contradictory opinions and opinions that change every day in the market. So these are simply nothing more than noise. And it is easy for anyone, even an experienced market person, to lose "investor sanity" here.

News is filled with noisy contradictions of what the market is going to do

Now to be fair to all the market experts in the news media, it is their "job" to give an "opinion" that is newsworthy. Besides, even these market experts know that you cannot predict what the market will do. All that one can do is react in the market.

Now reaction doesn't mean it has to be a "knee-jerk" one to what the market is doing daily. That is a recipe for disaster if everyone has to go buying and selling on every twist and turn of the market. Most people don't think of trading and investing as a "business." But lets for a minute consider that it is a "business" - a side business for everyone. Now how would you run your business? Not by seeking the opinion of others every day and taking actions based on that. Sure, market research matters, but then you would take that as one of the inputs into your decision framework. But most business decisions are made by first deciding on the goal/objecting, then analyzing data and creating a decision model for a given set of expected results. Once a decision model is made, a business focuses on executing it without letting any external noise distract it. Then the business would gather performance metrics, review these regularly and then iterate on the model if it deviates from the expected results. This is a systematic way to run a business.

The business of trading and investing is no different. And it is "your business," and nobody else's, because it is your retirement corpus and your hard-earned money.

So how would you systematically approach the question of "when will the market bottom"?

As I discuss in my book, following a "SACA Framework." It is a common-sense framework based on Systematic Anticipation, Confirmation, and Action.

So what is the "Anticipation" in this case: It is forming the hypotheses that we have:

  • The market has bottomed, and the rally is about to start
  • The market still has some more falling to do before it bottoms.

Now, the next step is to come up with rules that would "confirm" each of the hypotheses. Here is where the market domain knowledge comes into play. Again my foundational book on Systematic Trading helps provide the necessary domain knowledge for you to form hypotheses and develop ideas for rules to confirm. Let's say domain knowledge tells us that a market is not a single index but a constituent of stocks in that index. So we know that for the market index to pick back up the rally most of the stocks have to rally back up. As such, we do a "market breadth analysis" to observe the characteristics of what are the confirmation points that we can look for in the technical data from history that confirms that.

The following is an example of one such analysis. Now, this is not to say that it is the only way. The analysis also depends on individual investment horizon, goals and objectives, risk appetite, etc. But the following is one way to look at the market. See if you can spot significant characteristics below.

Visual Market Breadth Analysis

What are some of the confirmation points that stand out for the rally?

  • Usually, the weekly price crosses over the 40-week moving average.
  • Usually, the 40-week moving average pivots from a downward to an upward slope.
  • Usually, 50% or more of the S&P 500 constituents are above their 200-day moving average.

There are more such rules that someone can create. Once you have that, you can define the entry rules as actions like "buy on the confirmation.". Similarly, you can form a hypothesis for the market top and confirmation of that to arrive at exit rules as actions. Then you can backtest that historically to see if they are good markers of the rally and also good entry points that offer the best reward: risk ratio, a positive expectancy, and a good profit factor.

This now gives you a Trading System or Investing System. Now, all you need to do is follow the rules of your system and wait for the signals. You don't have to look for signals in the noisy news any more. What will this give you - complete peace of mind, a noisy-free way to approach the market, and the return of the "investor sanity."

This is why systematic trading is like mindful meditation for the market. makes it extremely simple for anyone to research, create, test, and deploy trading systems, irrespective of their trading or coding experience.