“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Isn’t it great when you are getting a strong, clear signal? Immediately most of us think about our cell phones. Then maybe we consider our WiFi and Bluetooth connections. Others will jump to their cable and satellite signals, while the old-timers will remember radio and yes, their rooftop, attic or rabbit ear TV antennas. In every case, it’s great when you are receiving the information that you want and need, loud and clear. In the above-referenced examples the lack of a strong, clear signal may result in interference, pixilation, or static noise. But what about when you are getting strong, clear, mixed signals?
There are plenty of examples of mixed signals in human nature. We say good-bye, but we don’t leave. They tell you they are really sorry while fighting back a smile. He tells you he is trustworthy but can’t look you in the eye. She says you are her best friend, but talks about you behind your back. These mixed signals are about mixed emotions, or mixed motivations. It gets even more complicated when you include intentional misinformation and flat-out deception. Unfortunately, that’s human nature, and even then, there is still no substitute for pure, clear communication.
The best examples of mixed signals that are founded in science probably involve our weather. While outside enjoying a warm, sunny afternoon you notice the wind picking up, then shifting from the opposite direction. Or you feel a sudden chill. The change may involve the activity patterns of birds or other wildlife. Or the colors of the leaves. Some of the mixed signals may be minutes in the making, while others may be months. The operative factor is that there is a change, however subtle or dramatic. And you won’t notice it unless you are paying attention, the sooner the better.
Financial markets represent the best and the worst when it comes to mixed signals. This is partially, and some would contend substantially, because of the human nature element. There is an entire science called behavioral finance, devoted to the way people react and respond when it comes to money. In many cases those behaviors are neither logical nor functionally effective. But the element of human nature creates opportunity, and opportunity makes the financial world go around! Fortunately, there are relatively efficient mathematical methodologies that have helped financial markets evolve into complex, sophisticated playing fields.
Those who pay attention to financial markets learn to recognize the subtle shifts that indicate change is in the wind. Initially, these changes become evident by the appearance of mixed signals. These signals can be very clear, but still require interpretation by experienced experts. A major change in direction of a security is often preceded by shifts of specific indicators, called divergences. A single divergence is not enough evidence to trigger a circuit-breaker response. Rather, it is the confluence of these divergences that can provide an experienced investor with the opportunity of making a more timely response.
Strong, clear signals are wonderful when it comes to financial markets, but they are rare. The human element fogs the windshield. The methodologies are numerous, and some over-respond. The keys to success seem to rely on how well you anticipate changes, in addition to the activation plan. We have developed processes that assist us in identifying specific mixed signals. When the major changes occur, we are less likely to be surprised and to freeze with inaction rather than taking action. We believe that an advantage resides in our early recognition of mixed signals, the accurate interpretations, and disciplined, timely responses.
Edward D. Foy, Manager, SELECTOR® Money Management.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com.