Malcolm Graham
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Malcolm Graham in Asian Markets,

Don’t let October-crash talk influence your investing

Many years ago when I started getting involved in financial media, I remember asking an anchor how ratings were at the time. The response I got? Not bad. The markets were calm, and there was a steady stream of eyeballs interested in stock- or bond-specific news. Made sense to me, and I thought the small-talk ended at that point. But then the anchor said something to me particularly interesting.

"The reality is ratings correlate to the VIX."

After laughing a little as that was being said, it dawned on me something which I think we all intuitively know, but is something not said so explicitly in the normal discourse of day-to-day living.

"I'm not going to take this defeatist attitude and listen to all this crap any more from all these people who have nothing except doomsday to predict."
—Carroll Shelby

In the business of investing, fear sells. This shouldn't be much of a surprise. When people are scared, are losing their money, or hear about some new existential threat, more time gets spent on news stations. While our minds abhor a vacuum, and the narrative always follows price, our desire to know what is going on increases substantially when things get volatile, either in stocks, or world stability.

Of course, more views means more ad revenue, which makes us have to question if there is an incentive across all forms of information sharing to incite just a little bit of doom. Few tune into late-night newscasts to want to hear about good, happy-feeling events. Rather, we want to know what bad things are happening, and get sucked into that drama when the truth of what's actually going on is likely a lot more complicated, and a lot less scary, than we are made to believe.

In my own writings, I have tried to strike the right balance, of course, staying true to the possibility of market advances or declines based on historically proven leading indicators of volatility (click here to download). Unequivocally, it is those more bearish moments in time that get people most riled up.

Make no mistake about it — declines are rare in frequency, but large in magnitude. Legitimate fears over a doomsday decline don't come every single day, but can come in short bursts. Unfortunately, in a world of continuous information that is negatively tilted based on the month we're in (October Crash!), geopolitical risks, or non-tested financial indicators, a shockingly large number of people seem to think the world is coming to an end right here, right now, and they have to act accordingly by buying or selling on price movements which are largely noise.

It doesn't work that way. Fear doesn't make for correct decision making. Consistent strategy and recognition of what works and what doesn't — unemotionally — is how to become a better trader and investor beyond the small sample.

Is an October Crash imminent because all we hear about today is 1987? Is it time to sell everything in your portfolio, regardless of whether it's a stock, bond, or alternative strategy? Objectively, probably not.

Take a look below at the price ratio of the Utilities Select Sector SPDR ETFXLU, +0.33% relative to the S&P 500 SPDRs ETF SPY, +0.21% As a reminder, a rising price ratio means the numerator/XLU is outperforming (up more/down less) the denominator/SPY. A falling ratio means the opposite.

Headline after headline might scare you, and you might always be on edge about what's to come. Some of those headlines are ones to legitimately pay attention to, particularly when there is a consistent indicator which continuously warns of short-term market risks.

However, to base your investment decisions on hyperbole that every day gets only more extreme will simply bring doom to rational and correct decision making over time. In the case of the utilities ratio above, historically when the ratio trends lower (as it appears to be on the verge of), odds do not favor higher volatility or a collapse in equities.

Focus less on the day-to-day hysteria and noise which gets your attention. Focus more on that which over long periods of time tends to work. With so much information at our finger tips, the illusion of knowledge actually results in that information being more damaging than helpful.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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