Conspiracies and failed traders

Market is just hanging on to top of the range. The earning season is yet to finish and there will continue to be surprises and disappointments. There are lot of cross currents on data and sentiment front, but the impact of them on market so far has been muted.

Relying on macro economic or sentiment factors has its own pitfall and by now most traders should have realised the folly of following such factors alone to make trading decision.The year 2006 as a good year to practitioners of such pseudo science, it kept them on sidelines. Those stuck on hypothesis are realising that the market is very ruthless in separating fools from their money.

Especially for those in money management business clients do not care about your hypothesis and conspiracy theories. They desert you much faster than you can churn out new hypothesis or new conspiracies. Even for newsletter writers cost of being wrong for extended period of time are fatal. Has anyone heard of Gilder Technology Report now. Once upon a time it was the hottest newsletter in town. Same phenomenon repeats again and again, investors always end up chasing wrong gurus and then drop them like dirty Kleenex.

One way out of that is to understand markets and some of the central tendencies of markets and build your strategies around them. Such strategies have enduring edge. Many of the market anomalies are well known like the earnings effect, the small size effect, the momentum effect, the value based anomalies and so on. They work across markets. For last couple of weeks I have been analysing data for Indian stock market for last 5 years and guess what, the biggest winners are all the stocks showing earning acceleration for that period.

There are countless studies which have shown the kind of anomalies which I mentioned work across different markets worldwide. There are hundreds of studies which have shown the stock market has an upward bias and long strategies outperform short by significant margin. But traders fascination with bearish side and short selling continues. If the US market was manipulated (as some bearish commentators and prominent and currently popular gurus keep on saying)then such anomalies would not work, but they continue to work.

My approach is to base my trading on such statistically proven anomalies and build models and refine them. Currently the model is on sideline and it went bullish in early August. Most of my comments on macro economics have no relevance to my trading. They are just mind exercises to keep the grey cells occupied.

One of the keys to profitable trading is to understand and master such proven anomalies and let the failed traders continue to believe in conspiracies.