Equities futures are rolling into their March contracts today which is in part why we saw a distinct increase in realized volatility over the past week or two. Not being a huge fan of rainy winters in the Mediterranean I for one can’t wait for expiration day which also happens to be my spring vacation season. Then again I shouldn’t complain about the weather judging by what some of my trading buddies in Chicago are going through right now. Scraping ice from your windshield is one thing, scraping it off your contact lenses is another.
When equities turns volatile each added gyration serves to stir the collective emotional cesspool of market participants. An unfortunate cognitive bias we as human beings all share is that we tend to see mostly what we want to see, facts, evidence, or reason be damned. Also known as ‘confirmation bias’ this factory installed feature of the human condition seems to particularly live up to its promise when it comes to the trading racket. Throw in a few wild swings and the bulls will regard each drive lower as an obvious dip buying opportunity while the bears see it as clear confirmation that the prevailing trend is weakening.
The equity market in particular has become extremely good at luring and then trapping people into highly volatile reversals. Which especially is true for those rare moments when we may be tempted to trade against the prevailing trend, which of course continues up, up, and then up. Given the increasing number of traps placed in front of us on a weekly basis I have a hard time imagining how anyone could succeed trading equities on a long term basis without the aid of some sort of participation measure (a.k.a. market lie detector) as for example our very own Zero indicator:
It is Sunday afternoon and that means we get to review the performance of last week’s historical top and bottom stock symbols in the S&P 500. As you may recall these symbols are the result of parsing a database containing over 50 years worth of statistical performance data. The idea is to extract the prospective top ten winners and losers of the coming week purely based on historical statistics. The result is then sorted by liquidity and any symbol that is scheduled to report earnings or pass ex-dividend is being excluded.