That's pretty much how I felt about yesterday's market action.
Confusion -- utter confusion. That was my thought as the four o’clock bell struck its closing clang. We had excellent housing news, with median home prices up a whopping 10% year over year. We even saw the recently hard hit bank sector zoom higher... and yet the market closed lower.
Because of the great housing news and strength in the banks, the late day sell-off smelled especially fishy. It “feels” as if some big players got the call that perhaps today’s meeting of European leaders may have a significant surprise waiting for us.
The "official" reason that the media pinned on yesterday's action was reported comments from Greece's former Prime Minister Lucas Papademos stating that Greece was looking at ways to exit the European Union. However, early reports this morning directly contradict yesterday's reports. Apparently Papademos said no such thing!
At the end of the day, we can drive ourselves crazy trying to figure this geopolitical stuff out, or we can use two simple strategies to overcome the confusion.
I developed these two strategies after going bankrupt in the markets in 1998. They not only helped me regain my wealth quicker, but they also allowed me to keep it when we went through the 2007-2008 bear market.
So let's talk about overcoming market confusion, because it can be debilitating to new and experienced investors alike. A rookie mistake is to try and cure confusion by getting more informed on current events -- reading more, talking to more investors, getting as many opinions as possible.
But haven't you found that can actually create even more indecision and doubt?
Here is what I have discovered: Curing confusion has nothing to do with anything outside of yourself. You cure confusion by having a highly defined investment process that you stick to.
A huge part of my own process is these two strategies that I discovered and still use today to combat confusion in my own trading and investing...
Strategy 1 - Know where you will get out of a trade before you get into a trade.
This one easy strategy will eliminate the majority of stress that can grip you when the market is acting in a confusing fashion. If you make sure that you have an iron clad stop loss point, along with a profit taking point, then the confusion will disappear.
This is because your stop will do the work for you. You'll either be right or you'll be wrong, and your stop loss will be there to protect you. It is incredibly freeing to go to bed each night knowing exactly what percentage of your portfolio you have at risk.
As easy as this sounds, only a tiny fraction of individual investors trade with a stop. If a professional trader at a hedge fund suddenly decided he wasn't going to trade with stops, he'd be promptly fired!
All professionals trade with a stop loss, and so should you. If you don't know how to do it yourself, you need to learn.
Strategy 2 - Decide what kind of an investor you're going to be.
How many times have you turned a short term trade that went south into a long term investment? How about the time that you nailed an excellent growth stock for the long term, then decided to sell it after a quick 5 point run only to watch it march 50 points higher?
These types of trades can be soul destroying, as they can lead to permanent dents in your self confidence. Thankfully, the solution is an easy one...
The first thing to do is to get clear on the type of investor you are.
Are you a short term trader or a long term investor?
Both strategies have completely different trade entry and exit rules. To make things simple, I keep my short term money and long term money in two separate accounts. I always use a stop loss with my short term trades, so there is never any risk of me attempting to hold onto a loser and delude myself by calling it a long term investment.
These two simple strategies completely free me from the paralyzing effects of strange market action. Remember: The cure for market confusion is to have a highly defined investment process that you stick to.
Chief Investment Officer
ETF Master Trader