Balance in the Markets

By Michael McCarthy, Chief Market Strategist, CMC Markets Australia 4% falls, 2% gains. It’s a hectic week, and it’s not over yet. The move to two year lows has the platform and the phones running hot as investors seek the answer to the question; “Is it time to panic?” While recent share price moves are concerning, emotional responses are rarely useful in markets. Traders and investors are engaged in the same markets, but they focus differently. These related activities can inform each other, and one lesson investors can take from traders is in making sure they remain on balance, and emotionally aloof from their market activities. Traders know that emotions can foster two key crimes against profitability – holding on to losing positions for too long, and jumping out of good trades too early. I’m on record as bullish of Australian shares at current levels. The 15% pullback in the index is masking some more substantial individual stock falls, and for the first time in more than two years some shares seem to represent good value. I acknowledge there are risks – as always. In my view the market bearishness on China is wildly over done, and I also think share markets have already priced in a US interest rate rise. Anyone who disagrees with these two propositions will likely be more bearish, and that’s okay. There’s plenty of room for honest disagreement in markets. But not according to some. After publishing a couple of pieces on the above last week, here are some of the comments back: The dismissive: “Piffle” Tending toward personal attack: “Baloney. Standard spruiker BS. McCarthy in a previous life was Captain of the Titanic; standing firmly on the sloping deck”. The cynical: “Buy buy buy, please, our business model depends on it …” (Um, no it doesn’t). The fantastic: “China is a mess and NO ONE KNOWS what its numbers are so no one sane could envy it. Global trade is FALLING. Container rates are dropping like a brick.” The collegiate: “Mate, that odd unpleasant odour is of it hitting the fan. Skip the heroics and get your life jacket on.” And the considered: “The key question for me is whether stock markets around the world will crash.” The one thing all the responses have in common is a high emotional content, with the exception of the last one. Anyone who manages traders will tell you that high emotional content in any discussion about markets is a sign of imbalance. It’s difficult to make sound decisions under pressure in fast moving markets when emotionally off balance. Good traders do all they can to make sure they do not end up in this state. Staying in good investment shape is matter of planning. Knowing your goals, timeframe, risk appetite, and broad investment plan is a good start. The idea is to know ahead of time how you will react in markets, whatever happens. Being mentally prepared for any eventuality helps keep emotions in check. To this end, traders should consider various market possibilities that could occur, and a (general) course of action for all of them. The reason this pre-planning contributes to investing success is that decisions are made in a calm and considered manner, away from market pressure. The reality of investing is that no one knows the future. All any of us can do is identify and apply investment approaches and plans that best match our individual investment goals. For many, this means getting expert help. However, there are various ways investors can increase the chances of higher returns; some structural, and others personal. Bringing a “cool” head to investment decision making is an important part of a smarter approach. So, yes, “The key question for me is whether stock markets around the world will crash.” The answer is yes, they will crash again at some stage in the future – that is the nature of share markets. However, in my view, the conditions for a crisis are not currently in place. One of the better indicators of this is the current focus on market risk – investors are unlikely to be overextended right now, and this is one of the pre-requisites for a market disaster. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.