A psychologist learns to listen to people. Sometimes what they say is straightforward. Other times, a person will jump from topic to topic in seemingly unrelated ways. The psychologist knows that, at those times, what doesn’t make seeming logical sense makes a psychological sense.
Maybe the person first talks about an overbearing boss at work, then talks about not feeling well, then talks about a friend who has been distant lately.
Underlying all of these is a feeling state, a sense of discouragement and frustration. It’s that state that is the theme, not the particulars. One has to see beyond the concrete details to appreciate the underlying theme.
Sometimes markets trade in uniform, coherent ways that we call trends. Other times, markets move up and down in seemingly random ways. We call those markets choppy and see them as difficult or even impossible to trade. But what if markets, like people, make their own sense during the times when they seemingly flit from up to down and back again?
The “choppy”, range-bound market may be one that is trading with a dominant cycle. It may be trading non-directionally, but continuing relative strength versus overseas shares. It may be in a range itself, hiding relative movements of individual market sectors.
Perhaps growth stocks are strong and value shares are weak. Natural resource stocks are strong, rate-sensitive issues are weak. Large caps are weak, small caps are strong. Very often, beneath the “choppy” chart are real themes that can be traded.
But we have to listen and look beneath the surface. Like the psychologist, we have to be sensitive to themes behind what seemingly doesn’t make sense.
Many, many times we develop a narrative–a view–and then become frustrated when the markets don’t follow our story. Can you imagine a psychologist operating that way?
If we can take our egos out of the picture–our desires to make the big market calls–we can open ourselves to what markets are really doing and trade accordingly. It all begins with a simple question, “What is the theme here?”