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Filtering The Noise

It's been said, "Information is king." True enough. We live in an age where technology has made information accessible and abundant in real time. That's good, to a point. The problem arises when there's too much information. It's a 24/7 information bombardment now. It's all urgent too, or so it seems. Even the weather is a full-time breaking news event. Added to that, every Tom, Dick, and Harry (and even some upstate guy named Mike) has an opinion on what it all means. And those opinions run the gamut from one polar opposite to the other. Ever watch CNBC? Then you know exactly what I mean. The truth is that the vast majority of the information we're pummeled with is Noise.

Noise? It's the stuff that's irrelevant in the grander scheme of things. It's a distraction. Many times it elicits emotional responses, like fear. It often seems so important. It's not. Don't get distracted.

The trick to effective trading decisions (or any decisions, really) is eliminating as much Noise as possible. Just because the information exists doesn't mean it's valuable. Much of it is pure garbage (speculation) or just not a determinant to any real end result. Focus on what matters.

So how can you tell what matters? Good question, but there is no one definitive answer. Noise comes in many forms: events, misinformation, speculation, rumors, and on and on. But make no mistake, Noise can still have market impact so you definitely have to be paying attention.

I've always thought traders hear Noise differently. We filter it on an instinctual level. While an analyst might have a fundamental basis for a particular view, they often times are perplexed by a stock's contrary action. I've encountered more than one portfolio manager that let Noise deter them from staying involved with a particular trade. Traders see and feel the market pulse while executing the trades, a keener sense of what the drivers of the action really are. It's like watching the see the waves building out at sea before they come crashing to the shore. At this point, let me just say that most analysts and PMs are infinitely smarter than me, but good traders are blessed with their own unique skill set.

I try to keep my decision-making process as simple as possible. I focus on fundamentals like earnings, evaluate the general feel of trading activity like volumes and price action (the charts are in my head - but if  you like technical analysis read Bulls Head Trading by Mark Putrino), and then overlay my geo-political view. Then I act. If I'm wrong, I make the necessary adjustments. Sounds like a lot of time expended but in reality, the decision process occurs in fractional seconds. To be a trader, you have to be nimble. You have to act.

With second quarter earnings season fully underway, the numbers have been encouraging, overall beating on both the top and bottom lines. That's certainly good news. The question is whether it's enough of a catalyst for continued upside before a substantial pullback. As I said last post, I'm an optimist. However, I'm also a contrarian and am still convinced there's a reckoning on the not-too-distant horizon. There's been no shortage of Noise, but the market has been resilient. I'll be delving into my skepticism a bit in my upcoming posts.