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Fed Policy and the Importance of Follow Through

Bob Lang
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Many of us are trained to look for tops and bottoms and game the markets accordingly. For the most part, this is the way our brains work Yet, intuitively speaking that is just the wrong tapproach. Tops and bottoms is generally a loser’s game, but following through after seeing a top/bottom take place can be the most lucrative profit opportunity. Our minds think in terms of finding the best value, letting prices fall to levels that we are willing to accept. Wal-Mart is a great example of this with the ‘falling prices’ concept. They will offer goods at discount prices and will drop them to an acceptable level to move the inventory out the door.

While the stock market does reward this behavior in the long run we have to be aware of all time frames. There is far more effect from market volatility in the short run and that can confuse many who are not focused on the bigger picture. For instance, I will perform a yearly assessment in late December of where Fed Policy is currently and where it is likely to be over the following twelve months.

A highly accommodative stance on Fed Policy tells me the stock market has backing and support, a good year should be at hand (but not without some volatility whips). A hawkish policy says we need to pull back some on our risk and tread carefully. With this assessment I will have a good read on how the stock market may perform over the next year, but it’s just a guide post. We know there are unlimited uncertainties that can derail the thesis but a year is a longer term plan for me, and I will stick to it unless information changes midstream.

As an options trader there are always options trading strategies with opportunities and especially in the short run, and I start with a look at stock charts. They will guide my decision to start/end an option play. However, I will not stab at a bottom or attempt to top tick a stock or market. An oversold stock can stay oversold for a long while, same for a overbought stock or market. Yet, when the turn happens and follows through with some volume and commitment then a trend may be established.

I will look to profit from better odds, which is following a trend rather than guessing at a top or bottom. That can be done at various points as a stock climbs or declines, but you’ll be wrong so often that when you finally do get the turn correct you’ll be far in the hole, and that will be psychologically damaging. If you play blackjack and lose say, seven hands in a row – you know that eventually you’ll win, right? But are you going to keep raising the bet for each hand? Perhaps that winning hand would come when you are down to your last few chips, and while that win may come with some relief, you are still probably in the red.

In the end, wait for a trend to develop, be patient for the confirmation and follow through of that trend and then play it accordingly.

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