Nothing Changes Sentiment Like Price


Nothing, nothing, NOTHING changes sentiment like price.

How do we know this?

Consider all the of the conversations currently around the possibility that the Fed and Treasury, in the space of 6 weeks, have KO’d the recession. V-shaped recovery baby.

I GUARANTEE you we would not be having these conversations if the S&P 500 was still at 2,200.

But with the S&P just 13% shy of it’s all-time high (and the NDX positive for the year) the case seems a lot more plausible.

And here, too, reflexivity comes into play.

Here is Soros on the subject:

“Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.”

Sound familiar?

It scarcely matters whether the recession has been killed off or not. The #stockmarket can make new highs so long as feedback loop drivers maintain the divergence of price from reality.

This is why I trade price, and not my beliefs about reality.

10 thoughts on “Nothing Changes Sentiment Like Price

  1. Interesting; keep them coming. I have not been trading lately; not comfortable with shorting although I used to15 years ago; maybe I’ve lost my mojo.
    All the best,

  2. Interesting correlation with regards to the theory of reflexivity by George Soros. I did want to question though in this regard. All things considered, would this then translate to the reinforce the notion of a V-recovery given the backstop by the Fed, regardless of the current underlying condition, continued deteriorating of the US economy and no vaccine.

    1. Good question Robert. The Fed has been able to heal the financial markets through the provision of liquidity. The Fed can print loans, they can’t print corporate earnings. The real economy has to catch up to the financial economy or vice versa. I don’t see how the financial economy and the real economy can remain uncoupled forever.

    1. Tao simply means “The Way”. It can also refer to “holisitc beliefs”. So The Tao of Trading is the collection of my holistic beliefs about trading that lead me to “the way”

  3. Thanks Simon, my belief (with some fib) was surely those employment figures over last two months would have impacted the market Negatively. Nope, grinded past my call spreads.

    1. As you allude to Adam, The market has paid ZERO respect to economic data. It some point there will be a convergence. Either the data will improve or the market will weaken. The Fed can’t print corporate earnings and if they don’t improve (a lot!) over the next couple of quarters there will be a reckoning. The stock market is very good at ignoring bad news until it can’t (witness the new highs it made in February even as the world was wathcing China enter lockdown)

  4. Yes agree. But this is the mantra of options traders, swing traders, short term traders. “Trade what you see, the market doesn’t care for your opinion.” But if you are a long term buy and hold investor you need an opinion on sentiment to take the trade in the first place and buy, HOLD and HOPE!

    1. I couldn’t agree more Jacqueline, trade what you see, mot what you believe. I’m not a long-term buy and hold investor by any stretch 😉

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