2021 introduced over 65 new market highs, over 100 billion of new trading money by first timers (as reported by news reports) and constant roadblocks and warnings, along with positive rhetoric from the Fed. For the first time, over 1 trillion dollars went into to ETFs; another concern for market watchers.
The new market participants constantly contributed to spiked short-term volatility. Other mental hurdles included our first 5% drawdown in over a year as fear of a property crisis grew as Evergrande Group (the second largest property developer in China by sales) defaulted, sparking a fear of international contagion. Supply chain issues, fear of actual upward spiking inflation, along with a companion fear of raising interest rates, covid and politics, continued to present mental blocks to trading with the constantly rising trend. Powerful earnings, that easily surpassed projections, provided fuel for upside continuation.
THE YEAR AHEAD
Many are saying that next year will see hurdles as inflation rises even further (Goldman Sachs), the Fed is expected to raise rates three times, and as supply issues are resolved, this will lead to overhanging supply and a slowdown.
Additionally, some are concerned that 2021 earnings were strong because companies were borrowing from the future, which will soften 2022 results.
INFLATION
You can easily assess both bullish and bearish views for 2022. One positive expression is that markets hate uncertainty – uncertainty was removed when, during the last FOMC meeting (December 2021), the Fed announced that they would fight inflation.
WHAT IS A TRADER TO DO?
Biases constantly blur trading decisions. This message is directed to traders focused on short-term trading with a heavy emphasis on day to very short-term activity. Day and very short-term trading, to be successful, requires a recognition of the importance of short-term inventory. Recently we have experienced days exhibiting swings of 100 handles or more. For example, on 12/15, the market saw a non-excess low of 4602 with an overnight high of 4743.50 (141.50 points). Then from that overnight high of 4743.50, the market saw a low of 4642 (101.50 points) on 12/16. The 17th saw downward continuation with an additional low of 4590 (52 points). Inventory swings, resulting from very emotional traders, were the main cause of these results, not economic changes. Economic biases have no standing for successful day timeframe trading.
TRAINING YOUR BRAIN FOR COMPETITIVE SHORT-TERM TRADING
There is very limited resistance to convincing people that physical activity increases our wellbeing. Hesitancy quickly arises when we begin to introduce the concept of exercising the brain. To help stave off or slow dementia, exercising the brain can be of a more general holistic nature. For playing the violin, chess, or trading, the exercise needs to be far more specific.
REPETITION WITH VARIATION
2021 offered variation that I have never experienced over the past 50 years, yet there was enough similarity to adjust to the more volatile and intense atmosphere introduced in the last year. The following is largely taken from the writings of Richard Restak, M.D. author of one of my favorite books, Mozart’s Brain and the Fighter Pilot: Unleashing Your Brain’s Potential. Both the fighter pilot and the short-term day trader are constantly susceptible to short-term reactive decisions. We are not addressing IQ, but rather what psychologists refer to as cognition. We all know people with high IQs that we aren’t impressed with, or strive to emulate. Cognition, as laid out by Restak, refers to the ability of our brain to attend, identify, and act. Included under cognition are alertness, concentration, perceptual speed, learning, memory, problem solving, creativity, and mental endurance.
Regular exercise of your brain’s cognitive powers is the first step.
As you enter 2022, our recommended suggestions are to focus on:
1. Basic knowledge associated with market-generated information. MGI is information emanating from the market rather than a talking head or analyst. It is information gathered from the actions of real people entering live orders. We see these traders in multiple stages, from innovators (first in) to early adopters, early, and late majorities, to laggards (last in). MGI includes learning to observe the tells from each of these groups, tells that will help you assign risks to your opportunities.
2. Along with your consumption of basic knowledge, we add mentoring to help you stay on a guided path.
3. The really hard work is your continual observation of market-generated information along with constantly learning how to adapt to change or variation.