OPENING POSITION

November 2013

LinkedIn, Facebook, and now Twitter — we’ve had one social media IPO after another. Is this the making of dotcom II? Is this why the equity markets are so hyped? They just continue to chug along, hitting new highs without the support of any solid fundamentals. And for whatever reason this market continues to rally, it seems to have also increased investor confidence, given that mutual funds are now seeing greater inflows. The longer this trend continues, the more worrisome it becomes. People are getting comfortable with the markets. It’s almost as if they have erased the possibility of a market crash from their memory.

The behavior of the markets has been unusual this year. This market didn’t follow the usual sell-off typically seen in the summer months. The two main questions that run through my mind are: 1) how long will this market keep on chugging, and 2), what will make this bubble — and yes, it looks like a bubble to me — pop. Here’s why I think we are seeing a remake of the dotcom era: We are overwhelmed with too much chatter from social media outlets. You have the bulls and the bears battling it out and saying anything they can to defend any position they own.

We are faced with information overload, and the challenge now is to be able to filter out information and use only that which is relevant to you. It’s not an easy task but one that is necessary, especially if you want to be a successful trader. It’s human nature to want to know what everybody is saying about that stock, exchange traded fund, option contract, currency pair, or futures contract that you just put all your money into. The more you hear what others say, the more you will be tempted to sway from your plan. Other people’s opinions can be extremely influential and are likely to affect the three most important components of your trading — that is, following your plan, being disciplined, and applying proper risk management.

Markets thrive on speculation, and anything — including greed, change in sentiment, or manipulation — could make this market pop. The higher the market gets, the more damaging the pop. As always, keep your eyes on the market and if it feels overheated, take your profits. You’ll sleep better at night.

 Jayanthi Gopalakrishnan, Editor

Originally published in the November 2013 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. © Copyright 2013, Technical Analysis, Inc.

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