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Does Your Fundamental Bias Cost You Money?


Some personal thoughts on bias.

A speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.
-- John Maynard Keynes

To combat depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection -- a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end.
-- Fredrich Hayek, 1933

I think many traders feel that Bernanke's printing press has given new meaning to the term "bull market." Bears are tired. It's like every bear on the planet has been waiting for the "real" market to emerge since at least 2010.

Personally, I've been quite bullish at times (early October 2011, and late 2012/early 2013 were probably my most bullish moments), but this market has felt, for lack of a better term, unnatural to me for a long time. But maybe that's just my fundamental bias.

I try my best to stick to what I see in the charts, but I am a fundamental bear at heart. I've learned that one of the psychological hurdles that creates for me is this: I can forgive myself when I'm bearish and end up wrong -- but I have a much harder time forgiving myself when I'm bullish and end up wrong.

If I'm bullish and wrong, that error eats away at me in a different way. There's a self-chastisement of "you know better!" because it offends my core sense of what I believe to be True (with a capital T) about the world in general.

I'm not sure if I can explain this in a way that makes sense, but I'll try: Our beliefs represent what we stand for in this world. And what we stand for in turn represents who we are, in a meaningful sense. At least, it has meaning to us on a personal level. Our beliefs generally represent the core foundations from which we build our enduring life principles -- so beliefs translate into action. As a result, we all associate "who we are" with our beliefs to a greater or lesser extent, depending on the depth and strength of the belief. This is why religion and politics are such heated forums; people feel criticized on a deeply personal level when those beliefs are challenged. They feel you are attacking not simply their ideology, but actually attacking them as individuals.

Anyway, I think this human tendency is one of the challenges that makes it so incredibly hard to get away from our fundamental bias. It's much easier to forgive ourselves when we err on the side of our fundamental bias because that error is in line with our self-image -- it's "who we are" to some extent. And we can forgive ourselves for "being ourselves" (we do it all day long!). Conversely, that same psychology causes us to criticize ourselves much more harshly when we err against our fundamental bias, which in turn causes us to make more errors toward the side of our bias.

It's worth examining. We all have a fundamental bias -- and I suspect it costs every one of us money at times. There are some additional thoughts on this topic in an article I penned back in January (A Survival Guide for Bears in a Bull's World) when I was quite bullish and trying my best to warn fellow fundamental bears.

Moving on to the charts, the market has followed Wednesday's near-term projection quite well, and the market has now moved into "close enough" territory for the target zone.

Click to enlarge

The big picture is essentially unchanged since last month. The alternate intermediate count sees the possibility that 1627 was it for the decline, and that the market is headed on to new highs. I'm presently still inclined to favor the bears (but maybe that's just my bias speaking!). There is both a bullish and bearish interpretation of the intermediate pattern; the bull interpretation is called an "expanded flat," and I discussed it at length last month.

Click to enlarge

In conclusion, if this is indeed the wave ii/B rally the preferred count believes it is, then it should be nearing completion. If the S&P 500(INDEXSP:.INX) moves above 1709 instead, then bears have their wave count reset and we'll have to start calculating new upside targets, beyond the current 1695-1700 zone. Trade safe.

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No positions in stocks mentioned.
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