Behavioural Challenges

Behavioural Challenges


  • 03 Sep 2020

I recently published a tweet and I am not sure everyone understood it. I said price action is everything. Now suddenly the worlds “Price Action” are like a new theory. All of technical analysis is about price action. Elliott Waves are price action. What I was really saying is do not look at time based analysis because of its high failure rate. I am not saying that time based analysis does not work or even astrological dates do not work. They are just less important than what the Elliott wave view is. The bigger problem is, because fewer people understand wave analysis they are looking for the Holy Grail and make time and dates and Astro their whole and sole. Many of these dates work just for a day but they are published as if the world will come to an end on that day. This can be misleading and keep you from taking action where wave analysis clearly gives you direction of the broader trend. Time dates in my experience are best used for risk management and that is all. It is more useful to traders in managing leveraged positions but almost useless to long term investors. Investor should ignore it altogether. In the investment time horizon there is only one such successful view based on Astro that is over publicised and the rest of the forecasts 80% of them I suppose fall on their face and are not recorded as evidence for anyone to see. [I could be wrong but I will go by numbers to prove otherwise]

The next big thing then is the impact of news. More recently it has been news around the Pandemic and how we react to it. Many have waited to take advantage of the value buying opportunity that the panic created. This takes me back to my early learning’s in the market. I read early on that bad news like wars were to be taken advantage of. Every one of you would have heard the saying “Buy when there is blood on the street”. The hard part is not knowing the theory but acting on it. When the data looks like it does below in India then taking action to the contrary is often difficult. But that is exactly why books are written about these small things. They are difficult to do in practice because news influences our mind more powerfully than anything else. The people we speak to and their opinions are a second layer. Investors and traders are subject to this “Recency bias” and “Confirmation bias” all the time. So when there is blood on the street the news flow is also so bad that it looks like investing or doing the opposite is the wrong decision. Welcome to the world of Behavioural finance.

The good news is that some parts of the world are reporting improving numbers like the US most recently.

Much behind others like Russia though. Many other parts of the world have flattened their curve.

In fact India’s data lags behind the rest of the world by about a month because we started reporting late and testing late. So if our cases started rising late they may also decline late. Expect the same flattening effect as seen in Brazil and US to show up maybe with a one month lag in India.

Europe has had it better with big declines from the first wave. The second wave so far from opening up appears like a wimp. They are trying to get universities functioning again with a combination of online and offline classes.

For those who cannot explain the last 4 months of market it was a lesson in Bhavioural Finance. Now on the opposite side it is true that things are not looking rosy. So markets will not be a one way street either. Corrections and consolidations will be part of the course. In fact individual stocks and sectors are doing that anyway. It requires focus on where you want to be. Economic data is back from the brink as everyone is attempting to get back to work. The move back to normal will be a process in the upward trajectory irrespective of speed. The risk of a major second wave will always haunt us till the virus is worn out by nature. It is a living organism trying to survive. So are nations and states that are turning on the hose of finance to keep their economies afloat. The result so far is an all time high in the US Nasdaq and S&P indices. The easy part of the markets moves are behind us.

Now its getting more difficult. Mapping govt action will be key. In India the biggest trigger could be lower interest rates. The chart below shows the recent bump up in bond yields for the 10 year gsec. Now they are falling again. The gap down maybe a contract change but still, once we head back down in wave 3 more money will flow into equities as an alternate for higher returns. 

This funding then finds itself back to people who need it, not just leveraged corporates but NBFCs that were on the brink. Raising funds at these lower rates will also become a tide and improve the balance sheets of many. 

The only risk to this appears to come from the recent spike in inflation data where even WPI numbers and CPI numbers appear to divege. Most of this inflation spike comes on the back of agricultural - food prices. The good monsoon should ensure the impact of this dies down into the year end giving RBI a final chance to lower rates into the second half of the financial year. Supply bottlenecks should also ease going forward. 



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