Welcome to the latest edition of “Weekend Reading For Traders”. We kick things off this week with an article that covers the hot inflation data this past week (as well as the market’s reaction in the back-half of the week) and then look at an article that considers both the unique advantages that smaller investors possess (as well as the cognitive biases that act as obstacles – and ultimately opportunities – as we navigate the action.
From there, we have an article that examines the recent action in a historical context (and the opportunities it’s creating) and pair that with a piece that offers some pointers on how we can develop our strategic thinking skills (which might come in handy sooner rather than later).
We wrap things up with two articles about exercise. One that sheds light on the link between exercise and memory, and another that teaches us an old-school strength and conditioning move that can be performed just about anywhere.
And with that, we hope you enjoy this latest installment of Weekend Reading For Traders.
Inflation Sits at 8.2% as Core Prices Hit Four-Decade High
(Gwynn Guilford | The Wall Street Journal)
Over the past few months, the market has confoundingly rallied ahead of important events and data, most notably ahead of the Jackson Hole conference in August and ahead of the CPI reading last month. The general narrative each time seemed to be that market players were anticipating some sort of indication that the Fed might relax its chokehold on the economy. Of course, that didn’t turn out to be the case, and investors wanted no part of this market heading into this week’s inflation data, which came in much hotter than expected… again. Led by higher shelter and food costs, the CPI hit a 40-year high, and like the previous week’s strong jobs report, again offered support for the notion that the Fed won’t be softening its approach towards inflation any time soon. Which brings us to Thursday’s action. After gapping more than 2% lower to start the day and moving even deeper into oversold territory, the indices began to bounce early in the session and didn’t look back. The net result was a massive hammer off fresh lows that triggered all sorts of comparative studies, notably that Thursday was only the third time that the S&P 500’s rally was so large that it engulfed the prior three sessions and only the 5th time since its inception that the SPY opened down 2% and closed up 2%. The subsequent action wasn’t unanimously bullish (most notable of which was the “minus two, plus two day” in Jan. 2008), but it has leaned positive, once again suggesting that, while the trend certainly remains lower, investors need to be at least mentally prepared to shift gears should positive seasonality (especially in midterm years) begin to take shape.
Joel Greenblatt on the Opportunity in Misbehavior
(Novel Investor | ETF Trends)
Contrary to what traditional Wall Street and the financial media tell us, there are more (and, for some, better) ways to grow our life’s savings. The truth is that, oftentimes, smaller investors have important advantages over big funds that allow them to move quickly to take advantage of opportunities as they develop (particularly in smaller names that often don’t meet the strict criteria of large institutions) and head towards the sidelines as conditions turn unfavorable. Moreover, smaller investors can choose from a myriad of styles and approaches that might fit their own particular needs and preferences. However, one thing that every investor (from the newest trader to the most seasoned money manager) has in common is the cognitive biases that can negatively influence our decisions… often at the most inopportune moments… like, say, when the market gaps down 2% after a particularly worrisome CPI reading! The fact is that we humans are hard-wired to give more credence to recent experiences (i.e., a strong market that seems like it’s never to down again or a weak market that feels like it will never recover) and fear loss more than we value gain (which is why so many investors tend to panic at lows). However, the first step is to at least be aware of the obstacles as we approach this market. And it’s when we take into account these biases as we implement our personal investing style and utilize our advantages as smaller investors that we can really begin to hone our craft.
Getting Long-Term Bullish
(Ben Carlson | A Wealth Of Common Sense)
It’s no mystery that this has been a challenging year for the market, and this past week was just another reminder of how difficult it’s been for investors to navigate the action (as well as the difficulties everyone is facing amid a relentless rise in the cost of living!). However, the fact remains that bear markets (as painful as they are) are a necessary part of a healthy market, and it’s these downdrafts that set the stage for the next stage of wealth creation. In this article, Carlson points out that, historically speaking, of the 8 times since 1950 that the S&P 500 has seen a decline of more than 25%, it’s seen positive returns over the next year all but one of those times, and has seen positive returns 3, 5, and 10 years out in each instance. Both the Nasdaq and Russell 2000 have similar track records. So while the current picture is discouraging (and so far the downtrend remains in place), it’s also important to think strategically and understand that this is the time that the next batch of opportunities is being created.
4 Ways to Improve Your Strategic Thinking Skills
(Nina A. Bowman | Harvard Business Review)
It’s no mystery that success as an investor requires more than simply buying good stocks and then making sure you constantly “cut your losers and let your winners run”. Effectively navigating the market requires an understanding of human behavior and being able to think strategically in order to take advantage of opportunities as they develop amid broader trends. While this article is written from a business perspective (i.e., “how can I think more strategically in my job”) there are some good insights for investors, including: being proactive about connecting with peers to broaden your perspective, asking questions and being curious (in order to look at incoming information from different angles and to learn new approaches and styles), working on your communication and writing skills (as the very act of putting our thoughts on paper will often help us formulate – and then stick with – our approach at any given time), and filtering out inputs that don’t help you move forward. Because, at the end of the day, that just knowing that you need second (or third) level thinking in the market is an important first step, but the real key is practicing the skills that will help you think more strategically.
New Study Strengthens the Link Between Exercise and Memory
(Rachel Fairbank | The New York Times)
The internet is awash with studies that cite the benefits that exercise brings to just about every area of our lives. One question that has been particularly difficult to answer, through, is whether or not exercise can strengthen our memory, as there are many other factors that can influence memory, as well as the fact that there are different types of memory in the first place). However, by using activity trackers, not only did the study find that people who exercise have measurable better memories, but that the intensity of the exercise also has a strong influence. As while light- to moderate-activity improved episodic memory (the ability to recall details about everyday events), higher-intensity exercise helped to improve spatial memory (i.e., remembering where the heck you left your keys!). And while more work needs to be done, the point remains that an improved memory is just one more reason to step away from your screens and get your heart rate up.
The Burpee: The One Exercise to Rule Them All
(Brett & Kate McKay | Art Of Manliness)
Sometimes it’s hard to find the time to get in a good workout. Sometimes the market will gap lower by 2% and then close higher by more than 2%… in the same day!. It’s times like this when a fast but effective workout would do us some good, and (according to the folks at AOM) the burpee may just be the thing. This old-school exercise has been around for ages, is a full-body strength training exercise, burns more fat than traditional strength training, does wonders for your conditioning, doesn’t require any equipment, and can be done just about anywhere. Beyond explaining the mechanics of a burpee, the McKays also offer some ideas to up the intensity of your routine, but at the end of the day, this move can be a great addition to your workouts or serve as a substitute for those days when there’s too much going on!
