can be the case that few actually have positions set in support of
this view. In such circumstances, the market maintains the ability to move quickly
to the upside because, despite the bullish forecasts, the market is still short. This
can happen, for example, when the expectations for a stock are quite positive
but the stock will soon go ex dividend.
This approaching event can be enough for potential buyers to hold off, waiting
to buy at a lower level after the dividend. That may sound contradictory,
but market price movements around dividends are not always
what the textbooks suggest.
Another example might arise if everyone is forecasting a currency
to be strong because of its trade balance and the amount
of investment flowing in but is concerned the country’s central
bank may intervene to prevent the appreciation of the currency.
Again, the market might be offering bullish forecasts, but
few, if any, participants are actually long. In the end, this is the
potential buying power that may well see the central bank overwhelmed.
Hence, the market can move sharply higher despite
consensus being bullish if this consensus has not been acted on.
Consensus expectations are the bread and butter of warrior
traders; however, what really distinguishes warrior traders in
this area is their ability to discern the quality of the consensus
view in terms of concentration and belief.
CONSENSUS VERSUS FUNDAMENTAL REALITY
Hence, getting markets right is about finding the difference
between the current (and likely future) fundamental economic
situation and the broad market perception—that is, the
consensus—of what that reality may be. Is there a variance
between the reality and the perception of a particular market?
If so, at some point the market will have to play catch-up, and
that period of adjustment is likely to provide enormous profit
opportunity for the speculator aware of this early in the game.
Sometimes the reality and the consensus perception of a particular
fundamental backdrop are aligned. More often than not,
however, they are either at odds or at least in some kind of divergence.
It is then only a matter of time before they are forced to
converge, and in most circumstances, due to the energy of the
catch-up phase, the market is prone to dramatically overshooting
the mark. This is the basis of all large and sharp adjustments
seen in markets.
The interesting thing is that when the consensus is the same
as the fundamental reality, there is generally not a lot of money
to be made—the reality has already been accurately priced into
the market. It is when the consensus differs from reality that significant
opportunity presents itself. However, how is it that,
given the high degree of communication in modern society and
the advanced analysis of economies and markets, the consensus
is frequently, let’s face it, wrong? Understanding why the consensus
frequently fails frees warrior traders from its often powerful
influence, allowing a more pure and objective focus on
major opportunities as they are presented as a result of this very
failing.
Read More: Consensus , The Level Of Belief And The reality
