It’s amazing what can happen in a week. Sentiment changes very quickly. As Ed wrote in his SNAPS column – news can be bad for your wealth.
With recency bias, we place too much emphasis on current events. A good example is Intercede yesterday. The stock jumped on what was a non-RNS.
Here's an extract: “The contract was included within the directors' expectations for the current financial year ending 31 March 2021.”
So if the contract that was announced was included within the directors’ expectations, that meant the RNS was just confirming what the directors already expected.
In other words, nothing had changed. And therefore, in the theory of Efficient Market Hypothesis, this should not have had an effect on the stock.
The stock was up 10% in early hours trading and saw a large spike in the average volume of shares traded.
Was this a coincidence? I doubt it. My belief is that those who read the RNS, placed importance on it, despite it clearly being signposted as not important. That is recency bias in action.
And this week, people are talking about the ‘second wave’. I don’t know about the numbers of deaths because 1) there is no utility for me in following it, and 2) I don’t read or watch news. But some parts of London it would be hard to believe there ever was a pandemic.
Nobody is taking personal details. Almost no social distancing. Does this matter? I don’t know – it remains to be seen. All we can do as traders is to play what is in front of us.
I hope we don’t have a spike in deaths. But if we do, and we also see localised lockdowns hit the economy, and stocks begin to fall again, then it will be time to start shorting and taking advantage of that weakness.
The FTSE 100 fell sharply yesterday, and without wanting to fall victim to recency bias myself, I do think it wise to make sure our exit plans for current positions are robust and that we do not fall victim to a greater peril: the awful “I wish I’d sold but I’m going to hold on and sell at breakeven” illness.
Many say that timing the market is impossible. And whilst I generally agree – it is possible to change your stance…
