Let’s clear something up…
There is a big difference in how investors and how traders look at the stock market. And that difference really doesn’t have much to do with the time frame involved.
Yes, it’s true that investors do tend to have a longer-term time frame than traders. But that’s only because it takes longer for the stock market to properly digest the information investors use. Let me explain…
Investors look at facts… They look at economic trends… They comb through company balance sheets and income statements… And they try to get an edge over the collective intelligence of the market.
Investors profit by being smart, by analyzing information better than the rest of the crowd, and by having enough confidence to trust their analytical abilities… even when a position goes the wrong way in the short term.
Traders profit off emotions. We try to recognize when investors are allowing the emotions of fear or greed to color their interpretations of the facts. And we capitalize by betting against them. Traders profit by keeping a cool head when all those around them are losing theirs.
Emotions tend to change faster than facts. So traders tend to be more short-term-oriented than investors.
I’m pointing this out to explain something that happened three weeks ago. On June 26, I wrote that oil stocks were oversold and traders should consider buying into the sector. The very next day, my colleague Matt Badiali warned investors to avoid the oil sector.
This difference of opinion caused more than a few readers to e-mail us and accuse us of talking out of both sides of our mouth. “Which one of you am I supposed to believe?” one reader asked.
The answer is… both of us.
Oil is up 10% since I said it was time to buy. And the AMEX Oil Index (XOI) is up 7%. Readers who followed my advice are making money. But this was an emotional, short-term trade… not a fundamental, long-term investment.
I agree with Matt about the long-term future of oil and oil stocks. The facts argue for lower prices over time. But stock prices don’t move in a straight line. So there will be plenty of counter-trend moves along the way.
Traders use technical tools like the oil sector bullish percent index to let us know when emotions have gotten too far ahead of the facts. In this case, we’re up 7% in just three weeks.
If you’re a short-term trader – and not just a long-term investor – you need to keep an eye on the technical indicators and be willing to bet against the overriding emotion in the market… even if logic argues otherwise.
Best regards and good trading,