financial markets. Looking at the data and perceiving the real
fundamental forces behind what is actually happening are two
distinct fields of endeavor, however. They can be successfully
married only if the practitioner is mindful of the shortcomings
inherent in the data.
In applying real fundamentals, opportunities abound for those
who question and observe in equal amounts. No doubt
about it, on a macro level, markets move
because of fundamental forces acting on them. All major trends
are the result of a significant shift in fundamental forces to a new
paradigm or an expansion of a previous state of affairs. If there
is a fundamental shock, such as a terrorist attack or major natural
disaster, the price shift can be dramatic and sharp.
Additionally, if there is no apparent shift in the fundamentals,
the markets can still shift dramatically—although perhaps more
gradually. This is because the fundamental forces that cause
such movements are a consistent influence. When it comes to
considering price action and the work of fundamental forces, I
imagine these influencing factors to be similar to the forces that
act on the water that is stored in a dam during a period of low
water usage. While little or no water may be leaving the dam,
water continues to trickle into it. Even though there may have
been little price movement for a period of time, it is not the case
that the fundamental forces have been dormant. The underlying
fundamental forces are always still at work. The pressure has
been quietly building, and almost anything can now act as a catalyst
for its release.
Apart from the economic fundamental forces at work upon a
market, there are several other large factors that dictate the
direction of our markets. The first of these is emotion, which is
addressed in the next section. Alongside the weight of fundamental
forces and emotion that daily have an impact on price
action are two other major forces: the media and the enormous
size of modern-day capital flows.
The conveyance of market information instantaneously via
the media reduces the opportunity for objective individual
assessment to play its role. The influence of the media is most
strongly seen in what is commonly known as the front-page effect.
The essence of this principle is that once a market movement
hits the front page of a standard daily newspaper, the unfurling
of the market trend being discussed in that story is complete and
it is time to go the other way. In other words, once a market shift
has become significant enough to make it to the front page, it
has effectively been recognized by all market participants, and
they will have positioned themselves appropriately. All those
who want to act have done so. There is only the market crowd
who are still coming to terms with the news, and it is these
Johnny-come-latelies who, last of all, react to the front-page
story. The warrior traders, lying in wait for the gullible crowd,
have learned that this situation often represents the last wave of
liquidity in which to reverse their winning positions and realize
those paper profits.
There is at least one warrior trader of whom I have heard
who sits in the Swiss Alps most of the year and trades only when
markets hit the front page. A quite important aspect of markets
that needs to be recognized is that they evolve, and characteristics
can shift and change somewhat. For instance, most markets
are traded far more heavily today by less professional traders—
that is, traders who do not work for large institutions and are
focused more on the big picture such as fund managers, but
traders who are in the market for the money they can make
today. The day traders tend to react to a greater degree and follow
media headlines in a herdlike fashion more than the larger
institutions. This is not because the large institutions are more
clever—far from it. It is a simple function of the role of committees
(as discussed later) in large institutions, which slow down
their trading response time. Ten years ago one could sell a bull
market that had just hit the front page the very next day and
do reasonably well. In today’s market, it is often best to wait at
least three days, and perhaps longer, for everyone who is going
to react to the front-page story to finally do so. The principle
remains the same, but the market has evolved to be a slightly different
animal, and so your trading response has to evolve as well.
The second of these major influences—the enormous capital
that is endlessly flowing into stock markets—also provides for a
slight variation to the front-page effect theory, which I refer to as
the “no doorway is big enough” phenomenon. This situation has
come about as a result of the global shift toward private superannuation
that has swept the world during the past 20 years or
so. This shift has generated huge parcels of money that continually
move around the globe to different markets. Overall, these
movements are largely dependent on sentiment and beliefs and
rarely have anything to do with reality. They are part of investment
or pension funds that are compelled by their investment
principles to head into equity, bond, or property markets within
a particular country. At other times they are simple currency
plays with no other purpose beyond speculation.
While with the front-page effect it is imperative to lead the
market and then exit quickly as the situation begins to reinforce
itself, one interesting aspect of the huge capital tanks that continue
to pour money into the market is that if you get into a
trend early, you do not always have to look to get out early, as
was once the case. It can take quite a period of time for the nowmassive
herd of very large players to shuffle through the sometimes
still relatively narrow market gateway—leaving plenty of
time for the nimble warrior to slip through.
The challenge for warrior traders is to escape the pure application
of orthodox economic theory and tread a lesser-known
path toward theories of varied principles that may exist in the
future, based on a study of broad sociological shifts currently taking
place. Clearly, some economists already do this, but it would
be preferable for it to be the mainstream, centrist approach of
contemporary economic thought.
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