Can you think of a time when you’ve been in the same mood all day? If you can, this was probably an abnormal day. Over the course of most days, our moods go up and down.

We may wake up feeling refreshed or tired; we may go into lunch feeling hungry or distracted; we may feel revived in the afternoon, or ready for a siesta; and we may come home refreshed or exhausted after a long day – depending how it went.

Over the course of a day, we may decide to enter a few trades – each time in a certain mood.

The mood elevator

The mood elevator is a term that’s thrown around a lot, usually in annoying jokes such as, “Looks like you’ve got a case of the Mondays! You need to raise your mood elevator!”

International firm Senn Delaney, which is focused on transforming work cultures, has a more serious and helpful definition of the term ‘mood elevator’.

At the top of the mood elevator is the higher mood level – including feelings such as resourcefulness, inspiration, energy and curiosity. Lower levels include emotions such as worry, irritation, a feeling of victimisation and overall lowness.

Being at the higher level in the mood elevator is good in that your thinking tends to be clearer. When you’re in a better mood, studies show that your IQ and EQ (emotional intelligence) also tend to be higher than average.

On the other hand, lowered mood leads to clouded thinking, excessive judgmental tendencies and unhealthy impatience. This means you’re probably making smarter trading decisions when you’re at the top of the mood elevator, and bad decisions when you’ve hit ground floor.

What to do

Senn Delaney outlined five steps to follow in order to keep mood clouding your judgment.

1. Note your state of mind and use your feelings as a guide to the quality of your thinking. Make an obvious effort to constantly check where you are on the mood elevator – make sure unhealthy thoughts aren’t recurring.

2. Take care of yourself. Our physical state has an impact on our thinking. If you’re tired and warn out, your mood will lower and your thinking will be cloudy. Better physical health leads to strength of mind.

3. Remember low mood equals unreliable thinking. If you’re feeling down, this is the important time to check yourself. Try not to make any major decisions; don’t make a bunch of trades just to make yourself feel better. If you can’t stop yourself from trading, use caution and don’t overreact.

4. Sense of humour is key. Sit back at some point during the day, think of what you have to be grateful for, and go over the last few things that have made you laugh. “Laughter is the best medicine” is a cliché we hear a lot, but it’s true… think about what a lot of your favourite TV shows are – chances are there are a few comedies in there. Humour and a light mood can help you handle challenges more efficiently.

5. Mood is contagious. Senn Delaney outlines this point in terms of management leadership, but the point behind this last tip is valid: if you are trading amongst other traders, or even while you’re at work amongst non-traders, the mood of others can greatly impact you.

Organisational studies show that a company’s culture and climate can be something you carry home with you. If it’s been a bad day for you at work, try not to let this shadow follow you home.

Carl Capolingua
Follow Carl on Twitter @CarlCapolingua
Head of Education
Australian Stock Report

 

   Written by: Carl Capolingua   Other posts from: Carl Capolingua

In today’s guide to investing we discuss Groupthink, a concept developed by social psychologist Irving Janis in 1972.

The term refers to the phenomenon whereby a group will make faulty decisions, because group pressures lead to declines in mental efficiency, reality testing and moral judgments.

In other words, groupthink occurs when groups tend to make irrational decisions and ignore rational alternatives.

A group is especially vulnerable to groupthink when all of its members are similar in background, and the group is insulated from outside opinions.

Groups are also particularly in danger when there are no clear rules for decision making. Scarily, this sounds a bit like the investment community, don’t you think?

Characteristics of groupthink

Think about your trading behaviour and mentality. Could you be someone who is vulnerable to groupthink?

Common symptoms of groupthink are:

- Maintaining an illusion of invulnerability
- Being tempted to rationalize poor trades (also known as “cognitive dissonance”)
- Believing in the morality of the group, or in the case of the market, investment community sentiment
- Using group stereotypes to guide your decisions
- Feeling the need to maintain an appearance of unanimity
- Ignoring your true gut feelings
- Putting up “mindguards” to blind yourself and the group from negative information.

If you’re engaging in the above behaviours, you might be succumbing to groupthink. It’s a very tempting thing, after all, to succumb to groupthink when you’re in a group or community.

This is especially so when there is a lot of pressure to make a quality decision, which is what the stock market is all about. However, the pressure to make a quality decision can lead to carelessness and irrational thinking.

People suffering from such pressures tend to disregard rational alternatives and feel that, since there is safety in numbers, one might as well act in accordance with the group – even if group thinking may seem faulty to an outsider.

Unfortunately, studies have shown that decisions guided by groupthink have a low probability of achieving successful outcomes.

The market and groupthink

We as investors are in danger of groupthink when we become heavily involved in the investment community emotion of the time – optimism during bullish times, and paranoia and fear during bearish times – and get swept away with this emotion.

Another example can be found in buying and selling behaviour. Groupthink works so that people feel that they have to follow the behaviour of the majority of the group.

It’s not an easy thing to stick to your guns on an opinion that is different from the rest of the group. That’s why at times – especially volatile times – we’ll see a lot of people moving to buy a security at once, or a lot of people hurrying to sell a security.

This is because it’s tempting to have your opinion validated by others in the group. And this temptation is never stronger when the market is suffering volatility.

The temptation to become part of a “herding mentality” becomes very strong. Investors are scared of making a bad decision, and scared of acting alone, so they follow the mentality of the crowd.

However, this doesn’t mean the herd mentality is right. Sometimes the market will react in an irrational way towards the latest economic news, even if the fundamentals of a company or sector are still strong.

It’s important to keep your head in these times; look at the facts, and act as an individual on the facts, and don’t succumb to a panic mob mentality.

No one has made it in the market by being swayed by the latest panic-spreading press releases or rumours!

Carl Capolingua
Head of Education
Australian Stock Report
Follow Carl on Twitter @CarlCapolingua

   Written by: Carl Capolingua   Other posts from: Carl Capolingua

Modern economics makes an assumption for both social and economic behaviour, and that is that all individuals will choose the best course of action based on the stable preferences and limitations facing them.

This is known as “rational choice theory”. Individuals will choose as rationally as possible based on the information made available to them. Though it is primarily an economic-social theory, rational choice theory is used in a number of fields, including criminology.

For the purpose of this lesson, however, we will look at the economic and psychological perspective of the theory.

It’s your choice

Rational choice theory is based on the idea that group behaviours are the result of individual actions. Typically, people are motivated by money and the idea of making a profit, so the theory fits in well with economics.

The concept is that people tend to be rational in character, and will calculate costs and benefits of any action before deciding what to do. The theory therefore rejects the idea that social action may be anything other than rationally motivated, even when it appears irrational.

One would hope that this is how individuals act when they make their trading decisions: they choose trades based on rational decision-making and the information available to them.

But is this what really happens in the market?

Throwing the market into the mix

The stock market is made up of many individuals making a number of financial decisions. Rational choice comes in when traders try to anticipate outcomes of different courses of action, and calculate which choice is the best for them. Right?

Well, yes and no. As traders, we try to make the choice that seems like it will deliver the best possible outcome to us as individuals. However, even when a decision looks like a good one, there is no guarantee that the likely outcome will eventuate.

The stock market is characterized by a lot of players and a lot of conflicting individual activity, meaning that nothing is certain.

Check your emotion at the door

Rational choice won’t always lead to successful trades, because there can be factors or information outside of our control that will lead to unpredictable outcomes.

However, rationality will always win out over emotionally-driven decisions, because it takes into account as much information as possible. Rational choice involves reinforcement. If a rational trading strategy is successful, the strength of this strategy will be reinforced by the reward of the successful trades.

Therefore, rational choices that lead to successful outcomes will be reinforced in our trading behaviour over time.

Carl Capolingua
Head of Education
Australian Stock Report
Follow Carl on Twitter @CarlCapolingua

   Written by: Carl Capolingua   Other posts from: Carl Capolingua

For a very long time, the price of gold did nothing but go up.  After all, gold is considered by many to be the ultimate safe-haven asset in times of economic uncertainty.

However recent history suggests gold may be losing its shine.  From a record high of US$1921 an ounce in early September 2011, the price of gold has slid around 20% to be currently trading just above US$1550.

What has driven this decline and is there further weakness in store for gold?  In today’s editorial we will attempt to answer these questions.

Recent history

As we can see from the chart below, there was an almost uninterrupted run-up in gold prices for much of the 2000s.  The price of gold has surged over 400% in the past 11 years!

What drove this run-up?  A few factors.

The tech wreck of the early 2000s sparked a mini-collapse in equity markets and dented investor confidence in some of the riskier asset classes.

In response, the US Federal Reserve (Fed), under the chairmanship of Alan Greenspan, embarked on a plan to keep interest rates as low as possible for as long as possible.

While this was followed by an equity market boom, investors became increasingly concerned about the potential for easy money conditions to result in higher inflation in the US (which eventually occurred).

Low interest rates and a widening US current deficit led to a structural decline in the US dollar, so more and more investors went looking for the next safest alternative asset – gold.

The panic induced by the GFC briefly lured investors back to the US dollar, but aggressive monetary easing policies by the Ben Bernanke-led Fed led to another major run-up in gold prices (again due to inflationary fears).

What has changed?

The chart shows gold topping out above US$1900 and since September 2011, it hasn’t really threatened to create a new high.

So what has changed?  Although the US dollar is still weak compared to a number of other currencies, on a trade-weighted basis, it has rebounded noticeably over the past two years (shown below).

The hyperinflation many feared would result from the monetary easing measures implemented by the world’s central banks never occurred.  Gold’s inflation ‘premium’ therefore is being slowly eroded.

As these inflationary fears subside the prospect of a collapse in the US dollar diminishes, which in turn is providing renewed support for the greenback at the expense of gold.

ETFs and the immediate outlook for gold

In a sign of just how serious the recent collapse in gold prices is, bullion holdings at exchange traded funds (ETFs) have fallen significantly in 2013, as we can see below:

The drop in ETF holdings highlights the extent to which investment demand is weakening.

The rationale for holding significant amounts of bullion is losing its validity; fears of quantitative easing-induced hyperinflation are abating and other asset classes like equities are offering relatively stronger returns.

The actions of ETFs carry particular significance because they are key players in the gold market. EFTs are dumping supply into the market at a time of weak demand, something that may continue weighing on the price of gold for a while yet.

This article was issued to our members of the investors report  on April 8th 2013, if you would like further information you can sign up for FREE recommendations and access all our research files on not only trading gold but all our current trading ideas. Simply click here and starting trading today, free for 7 days.

   Written by: marketpulse   Other posts from: marketpulse

The rollercoaster ride continued overnight, with investors struggling through a third straight session of volatility, as weak economic data from Europe and disappointing earnings reports in the U.S. prompted a pullback in stocks, the euro and oil prices.

European stocks declined for a fourth session, with the benchmark Stoxx Europe 600 Index falling to its lowest level this year, as commodity producers and automakers slid.

In London the FTSE 100 shed 60 points (-1%) to settle at 6244, whilst the German DAX slumped a whopping 180 points (-2.3%) to close at 7503. Stateside, the Dow Jones Industrial Average finished with a decline of 138 (-0.9%) to close at 14619, for a third straight session of triple-digit moves for the blue-chip index.

On Monday, the Dow suffered its biggest one-day decline this year, falling 266 points, before recovering most of those losses on Tuesday.

The three-day run of triple-digit moves is the first since late February, when an inconclusive Italian election cast uncertainty over Europe’s debt crisis.

The S&P500 gave up 23 points (-1.4%), to 1552.01, while the NASDAQ 60 (-1.8%), to 3205.

Spot gold prices advanced for a second day as global equities declined and on signs that physical demand is rebounding. Gold for immediate delivery gained 0.7% to $1,377.43 an ounce.

Oil fell to a four-month low as equities declined and U.S. output rose to a 20-year high. Crude for May delivery fell $2.04 (-2.3%) to $86.68 a barrel on the NYMEX, the lowest settlement since 14 December.

The British pound fell the most in six weeks against the US dollar after government data showed the U.K. unemployment rate climbed and wage increases slowed, adding to signs the economy is weakening.

Today’s session will bring us data in the form of the latest NAB Quarterly Business Confidence reading, at 11:30am, AEST.

   Written by: marketpulse   Other posts from: marketpulse

Though it’s important to use logic when setting up a trade, it may surprise some that creativity also has its place in trading. Creativity is generally considered to be the ability to combine novelty and usefulness, hopefully to obtain an innovative result.

It is also considered to be the ability for a person to restructure their understanding of a situation in a manner that may not be obvious to all.

Am I creative?

Apart from simple (possibly subjective) observation, it is difficult to determine whether a person is creative or not.

There isn’t a generally accepted method for testing creativity. Different studies have employed various tests, such as the “divergent thinking” test where a subject is asked to come up with new and useful purposes for an everyday object (such as a pencil).

Others have maintained that possessing a good sense of humour is an important aspect of creativity. You might watch a funny film or TV show and wonder, “how did the writers even come up with that idea?” because it’s not a concept that crops up in everyday thinking.

Testing conducted by Dr. Rex Jung, a research scientist at the Mind Research Network in the US, has shown that whilst the brain works like a straight road to get you from point A to point B when it comes to intelligence, the regions of the brain associated with creativity looks like a collection of side roads with interesting detours.

Another interesting fact about creativity is that, contrary to popular opinion, creativity doesn’t just spontaneously show up as inspiration just because someone happens to be “creative”.

A recent study suggests that creativity takes a slower path than that of intelligence, so the concept of a quick-thinking “creative genius” is more of a myth.

Using creativity

Anyone can employ creativity by letting go of their habitual response to a situation. Try to shut down what would be your automatic logical reaction to a situation, and “think outside the box”.

It doesn’t matter how long it takes you to think of a creative idea – once you’ve searched for a unique idea once, you will find it easier to come up with creative solutions the second, third, fourth (and so on) time.

Creativity can be important when you’re trading because it forces you to think about the market in new ways – and you might find a whole new trading style that could bring you greater success.

It should be good news to most traders out there that most of you probably are naturally creative. Risk-taking is associated with creativity, and most traders by nature are able to embrace risk.

Creative connections crop up when most people are relaxed. And what’s a great way to relax? To laugh. And the driver for laughter? Humour. Go rent out your favourite funny film, or take a look at that new show your friend swears is hilarious. (First make sure you friend has good taste.)

Then go have a glance over your recent trades. Are any new ideas for future trades cropping up?

Carl Capolingua
Head of Education
Australian Stock Report
Follow Carl on Twitter @CarlCapolingua

   Written by: marketpulse   Other posts from: marketpulse

Between 2000 and 2012 the price of gold went up every year, moving from $272 an ounce in 2000 to $1675 on the 31^st of December 2012.

That’s a 515% per cent increase over the period. The reasons why gold went up almost unchallenged were because of the precious metal’s status as a store of value and as an inflation hedge.

Since the GFC, these two factors have carried significant weight, as traders and investors have sought refuge in safe havens, as well as look to avoid the impact of inflation as central banks around the world printed more and more money.

These two factors acted as steroids for gold, supercharging its appreciation to an all-time high near $1900 in September 2011.

Now it looks as though the party is over.

Since the start of this year gold has fallen $340, which is equivalent to a fall of over 20%. The price currently sits around $1330, after Friday’s 9.2% drop – its biggest single session fall since 1980.

The rationale for holding significant amounts of bullion is no longer valid. Fears of monetary easing-induced hyperinflation are abating and other asset classes, like equities, are offering stronger relative returns.

There are also fears that central banks of cash-strapped countries, mainly in Europe, will need to sell of their gold reserves to pay down debt. This is extremely worrying given they are the largest buyer of gold.

Where to from here?

It cannot be said with any certainty how far gold will fall but in the immediate future the bias is bearish and $1200 is a real possibility.

Will gold recover?

Yes, it will but the more pertinent question is ‘when?’ At a certain point, the majority of traders and investors will begin to view gold and gold related stocks as offering fantastic value over the long-term.

That day is not today and won’t likely be any day in the immediate future, but it will come. We’ll be doing our best to help you identify that day and to benefit from it. Sign up for 7 days of free recommendations - click here.

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It’s tempting to think that we can use technical indicators, like the MACD, RSI, and stochastics, to guide our trading, but we should never place too much emphasis on any particular indicator.

If we want to focus on anything, it should always be the same thing: price and volume.

For all the wealth of tools available to you, they pretty much all come from the same two sources; price and, for confirmation, volume.

Know where you’re coming from…

Traders need to understand that the technical indicators that have been created over the last 20 or 30 years all derive their results from a mix of price and volume.

Therefore, if the price is telling you one thing, and the indicator something else, then you need to give precedence to price. So, do you only look at charts from now on? Just ignore indicators?

Of course we don’t. We should use as many pieces of information as we can, or feel comfortable with, when planning and executing our strategy. And, indicators will often point to a change in trend. Divergence, when the price is indicating one thing but an indicator another, is an important part of technical analysis.

…and know where you are going…

But, at the end of the day, you make money from prices, not indicators. So focus on prices and volume – and let indicators give you a second opinion.

With price, this is obviously the defining characteristic of any shares, and it determines whether we will make money with the trade. We don’t need to over-complicate matters – technical analysis can be just as effective when it is simple.

When looking at price, we need to focus on the price action relative to its past. For example, where the price closes relative to its open, or the previous close, will tell us how the market feels about a company.

In turn, after several days or weeks of price action, the market will then appear to move in one direction or the other, or in a broadly sideways pattern, signaling whether the stock is trending or consolidating.

Volume counts too!

Volume is of key importance when looking at the market, because it instantly shows whether price action is a result of few or many buyers and sellers.  This shows you the level of commitment to price action.

If the price jumps higher on very low volume, you might discount the move. However, if the price jumps higher on very high volume, this is confirmation that a greater than usual number of traders are committed to the stock.

Most importantly, a spike in volume signals a sudden change in sentiment toward a stock.

Specifically, it signals an increase in interest in a stock; investors might have become more negative or more positive, but they’ve definitely become more something.

In all, when using technical analysis, it is important to remember that core ingredients are just price and volume – and we don’t really need much more than that. Sign up for 7 days of free recommendations - click here.

Carl Capolingua
Head of Education
Australian Stock Report
Follow Carl on Twitter @CarlCapolingua

   Written by: Carl Capolingua   Other posts from: Carl Capolingua

The RBA held its latest monthly meeting today, deciding to keep rates on hold at 3%. The decision was widely expected by the market, with the market pricing in a 94% chance that the RBA would hold fire this month.

The RBA cited decreasing global risks, ‘robustly’ stabilisation in China and under-control inflation as among the reasons behind today’s decision and they are clearly in no rush to lower rates.

While today’s decision was pretty much a fait accompli and the RBA is reasonably happy with rates where they are, the market is still expecting the next move to be to the downside.

The RBA itself has said that it has room to cut rates further ‘if needed’. However the RBA also has faith that the cuts it has already made (cuts totalling 1.75% since late 2011) are more than enough to keep the local economy bubbling along.

But while there were some hopes we could see the RBA Target Cash Rate as low as 2% this year, the chances of a string of further cuts is looking increasingly unlikely.

While the Australian economy is not exactly shooting the lights out, there are at least some signs of strength visible. And that is enough for now to convince the RBA not to announce further cuts. Don’t forget, Australian interest rates are at their lowest since the 1950s and the RBA is going to have to see a stack of bad news before it slashes rates further.

The RBA looks at a raft of economic indicators to help it makes up its mind on appropriate interest rate levels; including such things as inflation rates, unemployment levels, retail spending data, terms of trade (Australia’s exports vs imports) and the Aussie dollar.

Let’s take a look at a few of these to see what they say about the economy and the chance of seeing future rate cuts. Firstly, let’s look at the unemployment rate. The chart below shows the unemployment rate tracked monthly over the last five years.

While unemployment is obviously much higher than where it was at the start of the GFC, the latest reading of 5.4% is still considered quite a positive result (and much better than most industrialised nations). Crucially, the last month saw unemployment tick lower with an impressive 71,500 jobs added during February – well ahead of the market’s expectations of 9,500 jobs.

Next, we will look at Retail Sales. The RBA pays a lot of attention to this as it does a great job of summarising households’ wealth, confidence and spending levels. It is a great indicator of whether consumers need stimulating or not.

The chart is quite choppy, and it can be quite hard to get a read on the direction of the trend. However, like the unemployment data the Retail Sales figures painted a particularly positive – if one-off – reading last month. Retail sales growth of 0.9% was the strongest reading since the middle of last year and came on the heels of months of seeing retail spending actually shrink across the country.

Now both of those charts show some recent positive readings amid generally middling trends. So why doesn’t the RBA just keep cutting rates? What do they have to fear? The answer is inflation. The RBA is worried that if they cut rates too far or too quickly, then inflation (prices of goods and services going up) will run out of control. And keeping inflation under control – ideally between 2% and 3% – is one of the RBA’s key goals.

The chart above shows inflation on a quarterly basis over the last 10 years. You can see that current levels are some of the lowest seen in the last decade and the last reading of 2.2% is well comfortably within the 3% limit that the RBA aims for. The RBA today acknowledged that inflation is consistent with its medium-term targets.

So where to from here?

The recent RBA rhetoric has clearly been painting a picture that the RBA is not going to cut rates further unless things go to hell in a hand basket. Short of a major global financial shock and/or a sudden and sharp deterioration in the local economy we don’t see any more cuts in the coming months.

The RBA thinks its previous cuts are doing the job intended and won’t cut further until they see proof otherwise.

Looking at the bond futures markets, we can see that the financial markets are currently pricing in rates to be at 2.77% by the end of 2013. So according to the market’s current thinking, at best expect to see one more rate cut by December. And the chances of rate cuts (according to the market) are falling every day. Late last year, the market was expecting rates to be down to 2.35% by the end of the year!

So you can see that with rates back to record lows, the days of hoping for a series of more rate cuts (at least by mortgage holders, not retirees/savers) are clearly over. The only thing that will see rates down to near 2% is some kind of economic meltdown. And that’s something that nobody is cheering for.

This editorial was published to our Investors report Tuesday 2nd April – Access the investors report FREE for 7 days

   Written by: marketpulse   Other posts from: marketpulse

We’ve all heard the term “herd behaviour”, but before explaining how it relates to investors, its best to provide some background into the term.

Herd behaviour describes how a group acts together without any planning or logic behind their actions.  Animals tend to exhibit herd behaviour when under attack from a predator.

If a group of zebras are running away from a lion, each additional zebra that joins the herd does so because they see a group running away from something; therefore they must join that same group. None of these new zebras attempt to verify the existence of the lion; they will merely do what all the other zebras are doing.

Back to the markets

So, how does this relate to the stock market? In strong bull or bear markets investors have a tendency to act like these zebras.

Consider the bull market leading up to the global financial crisis.  During the middle part of the decade, nearly all stock markets around the world moved in one direction – upwards.

We can safely assume that a significant percentage of the people that bought equities during this time did so because they wanted a piece of the action.

People were making money from the stock market, drawing other people into investing, which further pushed stock prices higher, and so the cycle would just continue.

Now consider the bear market that followed.  When stock markets were crashing throughout 2008, people were getting scared and selling off their shares.

The sell off depressed share prices, which caused more people to sell their shares, which therefore continued the cycle. In both the bull and bear markets mentioned above, consider how many investors assessed the merits of the stocks before buying or selling them.

People saw other people “running” into (or out of) stocks and simply decided to join the “herd”.  They were acting on emotion – specifically, the emotions of greed and fear.

The effects of herd behaviour

Not every person who invests does so because everyone else is doing it.  Smart investors buy or sell stocks because they have done their homework before actually investing. These same investors would have noticed the massive run up in equity prices in late 2007 was driven in some part by herd behaviour.

They would have calculated that stocks were becoming overvalued, and so they sold their investments at the height of the bull market, thus locking in a nice profit.

Others would have noticed this and sold their investments as well. The process then cascaded until everyone was selling their investments, and the end result – the 2008 stock market crash.

How to avoid herd behaviour

Avoiding heard behaviour can be especially hard during periods of mass euphoria or panic.  When stock markets are falling 50%, it is tempting to just throw in the towel and sell your own shares.

During these times, it is important to keep a level head when making investment decisions.  A cardinal rule in share trading and investing is never act on emotion.

If you sold your shares in March 2009 because of fear, you would have missed out on the strong recovery that followed. When everyone is either buying or selling shares, assess whether buying or selling is the right thing for you to do.

Whether you follow Fundamental Analysis, Technical Analysis, dartboards or tarot cards, all your trading should be based on a system and not on emotion. That’s the only true way to ensure you don’t get trampled by the herd. Sign up for 7 days of free recommendations - click here.

Carl Capolingua
Head of Education
Australian Stock Report
Follow Carl on Twitter @CarlCapolingua

   Written by: Carl Capolingua   Other posts from: Carl Capolingua