To news followers and economic-data lovers, the 35% rip in the S&P 500 off the lows defies logic. They’ve fought the rebound the entire way up. Being wrong for that long should make you rethink your process. Today’s blog is my attempt at doing that.

Let’s assume you’re an active trader willing to shift your portfolio from bullish to bearish when necessary. What is the process you use to determine the shift? Is it news? Your gut? Economic data? Or price and technical analysis?

Or is it random?

Do you even have a process? If not, then your results are going to be all over the map. You’ll also probably remain bullish in downtrends and bearish in uptrends, only to finally switch teams at the wrong time.

This topic is relevant right now because the market went from extremely bullish (pre-February) to extremely bearish (February through mid-March) to extremely bullish (mid-March to now).

Staying bearish over the past two months has required taking almost as much pain as if you stayed bullish throughout the crash.

In my daily routine for my active trading account, the second thing I do after assessing the broad markets is ask myself the following three questions:

One: What is my portfolio’s beta weighted SPY delta?

Two: Is it within my comfort limits?

Three: Does it reflect my bias?

3 Crucial Questions

The first two questions are easy to determine. I’ve discussed how to think about them here and here. But the third question is the tricky one. To answer it, you have to have a process to determine your bias. I like to use our number scheme of -3 to +3 to reflect the entire spectrum from aggressively bearish to aggressively bullish. But you don’t even have to get that granular. How about just identifying if your bias is bullish or bearish?

My preferred metric to determine my bias is the price chart, and I’ll tell you why. It’s objective, not subjective. It’s timely. It doesn’t require me to construct a compelling narrative that includes economics and politics. It just is. Simple.

Wisdom of the Crowds

I think I’m smarter than a 5th grader, but I don’t profess to be smarter than the crowd. I don’t know how to consistently identify when they are wrong, and since the crowd IS the market, I’ve discovered it’s much better to go with the flow than fight against it.

If you’ve been using economic data to determine your bias, then you should be as bearish as ever. Tens of millions of people are out of work, and our GDP is in the toilet. The problem with economic data, however, is that its backward-looking. In contrast, stock prices are forward-looking.

Do you want to base your trade decisions off the rear-view mirror or the windshield? Conventional wisdom says the market attempts to look six to nine months down the road.

Aside from being backward-looking, the problem with news and economic data is you don’t know if it’s already priced-in. You find that out after the fact by looking at the response by price. For example:

Bad news hits, and the market stagnates. Takeaway – the bad news was priced-in.

Bad news hits and the market tanks – Takeaway – the news was worse than expected and not priced in.

Bad news hits and the market rallies. Takeaway – the news wasn’t as bad as expected.

It’s not the news that tells you what to do. It’s the response in stock prices. So why not just cut to the chase and focus on price?

Only traders who have been able to suspend their disbelief and turn bullish over the last two months have made money. And here’s the thing. Someday all that crappy economic data may well tank the market and necessitate turning bearish again.

But do you know what will tell you that day has arrived? A price chart.

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