Driving with the rearview mirror

One source of continuous fascination is the stock market. Why not? Put in a little money, it grows, and in the end profit without labor. How can you not like that! Billions of dollars is exchanged on the world's stock exchanges daily. Stock markets exist as an easy way for companies to raise money through a collective public ownership. Of course, the market operation is much more complex.

The psychology behind this money for nothing concept supports the main market drivers, fear and greed. Everyone who has struggled to make a dollar and put it into an online brokerage account understands this. They love when the market goes up and make money. Optimism pushes buying, the market rises. They absolutely hate when the market goes down with money evaporation. Pessimism leads to selling, the market craters. In the end, the market is a sentiment machine driven by the various kinds of investors summarized by this site.

Excluding day traders, two main kinds of investors exist: fundamentals and technical. Fundamental trading is based upon the idea that a stock is worth a certain value according to corporate size and revenues. Profitable companies are worth more than unprofitable entities. The other investors are technical traders and their trading is dependent upon derived indicators. Some of the best known indicators are:
Moving Average Convergence-Divergence (MACD)
Fast and Slow Stochastics
Relative Strength Index
Bollinger Bands.
The basic concept behind all of these indicators is to identify the point at which a stock changes momentum, i.e. stops going down in price and begins to appreciate.

The movement of the markets has thousands of traders everyday bidding prices up and down. Buying and selling stock. One school of thought has stock market movement being random. Looking over years of stock market data, patterns appear. Typically in upward movements followed with an occasional sell off forming a wave pattern. Personally, I believe the day-to-day patterns are random, but over time patterns do exist. Technical trading is supposed to clue an investor into these patterns identifying momentum changes. Honest traders admit they are lagging indicators or tools that tell investors when to buy (or sell) after the momentum has already changed. I agree, but another serious issue that is a fly in my ointment is these indicators all use past data. What happened yesterday, may not necessarily happen tomorrow. Yes, the indicators show stock price going up. If another disaster like 9/11 hits New York, will the indicators show this. NO!!!!!! As we discussed earlier, the market tends to be a sentiment indicator. One frustrated mutual fund manager has heart burn from his favorite Indian restaurant may drive down a stock. The indicators will not pick this up until it is too late. I think the best analogy is driving down the road using the rearview mirror instead of looking through the windshield. That crash ahead is pretty rough.