The Hidden Message in the Stock Market Revisited, Part Two

The Hidden Message in the Stock Market Revisited, Part Two                                   

In lieu of my last post, permit me some observations…

Keep in mind that everything I talked about in my last post was after the fact, while it is true that I did notice the things I mentioned I was still looking out into an unknowable future where anything could have happened. When using this data about the adv/dec line and its momentum indicators there will be a strong urge to predict and forecast future market movements. I strongly suggest you resist that urge. Remember when you try to predict the future you will be facing two formidable antagonists, your Ego (yourself) and randomness (pure chance). Instead I think you will be better served by using this information to manage your risk. If the market is going up but losing momentum along the way, you may want to trim some of your overbought positions (it would be nice if they didn’t pay out a rising dividend) while putting some cash aside for future opportunities. When the market is bottoming and momentum is indicating that divergences are taking place you can take on some oversold positions with a “margin of safety”. Don’t forget to thank “Mr. Market” for the opportunity. And keep in mind these decisions will be few and far between, the market doesn't always have something to say.

Try to look out at the future as a series of outcome scenarios . Howard Marks has written about this and called them probability distributions. In other words various outcomes are possible and at different amplitudes. Basing your judgements on the current market environment ask yourself what are the chances of such and such occurring. This strikes me as a better way to utilize the information that the adv/dec line offers. 

One more thing, if you do notice the market is topping out or bottoming, pay attention to the sectors in the market. Oil topped out with the market in the late summer of 2014. And the material sector started their rebound off the the market lows of January this year. The market is an interesting place.