Predicting Investment Markets.

Forecasting investment markets is a guessing game but the US Presidential election offers some clues to how the near-term might play out.

Predicting Investment Markets.

Forecasting investment markets is a guessing game. There are myriad opinions from very well informed people who mostly get it wrong.

You can analyse data and statistics, calculate probabilities and take your positions but you are only guessing as to what will happen. Historically the best traders have known that and their plans are made around responding to the market when it proves them right or wrong.

That means they manage the trade when the direction of prices is confirmed. If they are right, they leave the bet on and sometimes add to the position. If they are wrong, they cut their losses to keep them a minuscule part of their trading capital. That way they survive to trade another day and grow their funds.

Unfortunately, that process is the opposite of what most amateur traders do. The ego jolt of being wrong is too much to bear and so they keep their losers waiting for them to recover. That process is often accompanied by the mantra 'you don't lose until you sell'.

And when the trade goes in the right direction they say 'you never go broke taking a profit' as they cut it short and potentially miss out on outsize gains.

That's why trading financial markets is an exercise in emotional control as much as any financial formula. The best traders have a proven plan and stick to it. They aren't invested in their own egos and understand that even if they are wrong most of the time, they can still make a lot of money.

Of course being a trader is different to being an investor. They require different mindsets and for most people a well constructed, diversified portfolio with periodic rebalancing is the best way to go. That's what you'll find in most superannuation funds when you choose the balanced, conservative or growth option.

Each portfolio will be skewed towards a slightly different outcome but the process of periodic rebalancing is the same.

All that said, there are times when experience and instinct makes having a guess as to the broad direction of stocks somewhat tempting.

Since March, the stock market has been on a non-stop bull run, fuelled by government monetary policy. Given the state of the economy it hasn't made a lot of sense but a good trader goes with the flow and a lot of people have made a lot of money as a result.

But there comes a time when the market needs a 'breather' which retraces some of the recent gains. Most people know it as a market correction as winners take some of their profits off the table.

There are generally some good indicators of when this might be due. One leading one is when the public media is filled with success stories of amateur traders and golden market performances. I've seen a bit of that in recent times which always makes me cautious.

Compounding this caution is the US Federal election. The Democrats want the economy (as represented by the stock market) to sink so they can blame Donald Trump. Given most of Wall Street is in the Democrat camp, they will do what they can to damage the President and make money by doing it!

On the other hand, President Trump knows his electoral success is linked to the stock market so he'll be doing whatever he can to keep the cash flowing into stocks and build 'wealth' for Americans.

Now neither of these two forces can manipulate the long term direction of the market but they can engineer short term responses and that's what I think is due to happen.

The Wall Street Democrats will use the weight of money and derivatives to push markets down and as that unfolds, the US government will respond with more money printing to make things better leading into the election.

As I said right at the start, predicting markets is a guessing gamer but my guess is we'll see a short term correction some time soon and then a concerted push to rally stocks before November 3.

Stay tuned for a political fight fought on the battlefield of finance.

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