Is The Market In A Bull Or Bear Phase? The Answer May Surprise You
Late last week, I mentioned that I would field questions from subscribers
regarding trading psychology. Over the weekend, a reader asked:
“I feel like I’m missing opportunities when I don’t hold positions (in
the stock market) overnight, but every time I do, the market moves against
me. I know you study these things. Do you have any
suggestions?”
It’s a good question, with a somewhat complicated answer.
You see, the market has a condition known as multiple personality
disorder. That makes it difficult to trade “the market”, because
the market doesn’t always behave like “the market.”
For example, would it surprise you to know that the Dow has been in a bear
market for the past two years, losing over 900 points?
Would it surprise you to know that it’s been in a very strong bull market for
two years, gaining over 2500 points?
And would it really surprise you to know that both are true?
Let’s look at the numbers. We’ll take the Dow Jones Industrial Average
(cash) since the start of July, 2003 (N = 533) and calculate several values:
- The total change in the Dow;
- The amount that the average has gained or lost from the close of the
previous day to the end of the current day’s first hour of trading; - The amount that the average has gained or lost from the close of the first
hour of trading to the start of the last hour of trading; - The amount that the average has gained or lost from the start of the last
hour of trading to the close of that day’s trading.
The totals appear in the table below:
| Dow’s Total Change | Change During First Hour | Change During the Midday | Change During the Last Hour |
| 1559.36 | 1966.54 | -956.76 | 549.58 |
Now you see the problem. Traders who bought the
market at the start of today’s last hour of trading and sold at the end of
tomorrow’s first hour made a killing. “The market” was behaving like a bull over
this period. Traders who bought the market at the end of the first hour of
trading and sold at the start of the last hour took large losses. “The market”
was behaving bearishly during that time frame.
If you’re feeling that the market is perversely moving against your positions
when you hold overnight, perhaps it’s because that’s exactly what the market is
doing. After all, just because you’re paranoid doesn’t mean the market isn’t out to
get you. I sliced my data a different way and examined what happens during
the first hour of trading the next day when today’s midday hours are up (N =
259) versus down (N = 274). When the midday hours have been up in price,
the average change the first hour of the next day has been -1.84 points. When the midday hours have been down, the average change the first hour of the
next day has been 8.73 points. In short, extrapolating trends from today
to early tomorrow has not provided an edge in this market.
My advice is to consult your journal and examine the positions that you entered
midday and held overnight. If you find that many of these are shorts designed
to ride midday weakness, you now can see that the market has been reversing
these. A more promising strategy would be to look for setups on the long
side following a weak midday. You might just be able to
capitalize on the market’s multiple personality.
Have a question for the doc? Send it my way at sonderstel@aol.com!
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003).
As
Director of Trader Development for Kingstree Trading, LLC in Chicago, he has
mentored numerous professional traders and coordinated a training program for
traders. An active trader of the stock indexes, Brett utilizes
statistically-based pattern recognition for intraday trading. Brett does not
offer commercial services to traders, but maintains an archive of articles and a
trading blog at www.brettsteenbarger.com.