The biggest trap for stock investors is the bias you can’t see

0
19


What do you see when looking at the image below?



How about A B C and 12 13 14? That’s what most readers will see.

It is, however, possible, and just as plausible, to read A 13 C and 12 B 14.

It’s simply a matter of interpretation and context. For most of us, our brain made the decision for us, creating a bias without much, or any, conscious input.

It’s almost scary how quickly and subtly a bias is created, and when it comes to investing, biases can be costly.

Are you a victim of biased investing?

The biased investing trap

Nowadays, nearly every headline conveys a bias, and because it’s getting harder to capture someone’s attention, even trivial events are sensationalized in an effort to capture eyeballs.

Here is a prime example of biased reporting:

The Dow Jones Industrial Average












DJIA, +0.13%










 has been red hot, so we will be looking for two diametrically opposed interpretations of the very same DJIA chart.

As with any dispute, there are three sides: One, the other and the truth. (Also know as: his, hers and the truth.)

Here is the DJIA chart along with one long-term trend line.



Dow Jones Industrial Average — bearish

The DJIA is just above a multi-year trend channel while overbought. According to some Elliott Wave Theory analysts, this is a throw-over top to complete a 5-wave rally from the 2009 low. This implies a bear market is imminent.

Furthermore, two weeks ago the DJIA soared 2.85%, the biggest weekly gain since Nov. 7, 2016. This gain came after an already extended rally, which, according to popular opinion, must be a last gasp.

Dow Jones Industrial Average — bullish

However, history says otherwise. Since 1980, there were five other times when the DJIA spiked to a new all-time high on the biggest weekly gain in 52 weeks.

Every single time the DJIA was higher one month later. Only one such event was followed by a brief loss — 5.14% in February 1993.

The chart below highlights the last three occurrences (11/27/17, 11/7/16, 10/27/14). The others happened in 3/10/86, 2/1/93, 6/6/97.



Dow Jones Industrial Average — the truth

Thanks to the internet, blogs and social media, there’s been more information (and more bias) than ever before, and distinguishing facts from fake facts has never been tougher.

It’s not always possible to reconcile conflicting opinions, but knowing both sides will bring you closer to the truth.

The Profit Radar Report never relies on any one single indicator, but ever since Elliott Wave Theory (EWT) correctly projected the February 2016 low, I’ve paid more than usual attention to those indicators. Our indicators suggest zero risk of a bear market. (More details here.)

The Aug. 28, 2016, Profit Radar Report published this EWT-based projection. At the time, the S&P 500 Index’s












SPX, +0.23%










 upside target of 2,500 points was widely mocked, but a few months ago I’ve had to elevate that to 2,600 and 2,650.

Even my highest upside targets have been met. Now what?

Conclusion

My favorite market-top indicator — which correctly foreshadowed the 1987, 2000 and 2007 tops (more details here) — suggests that a major top will have to wait. However, EWT suggests that this 5-wave rally is nearing an end.

In summary, the weight of evidence suggests that the risk of a correction is getting closer. It will take a move below the DJIA trend line shown above (on both the log and arithmetic scale) to start confirming a top is in.

A more detailed short-term forecast is available here.

Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report. He has appeared on CNBC and FOX News, and has been published in the Wall Street Journal, Barron’s, Forbes, Investors Business Daily and USA Today.

Video: Here’s how fraudsters can ‘steal’ your voice to rob your bank account



Source link

NO COMMENTS

LEAVE A REPLY