Tuning Out

"Clear the mechanism."
--Billy Chapel (For the Love of the Game)

Financial markets occasionally get 'loud' for me. While trying to stay focused on the 'signal' (the information that really matters w.r.t. the direction of the tape), I am bothered by the 'noise' (trivial information that obscures the signal or sends false signals).

When I don't sense a strong signal, the noise is welcome. Noise drowns out false signals and keeps me from acting when I shouldn't.

However, when I sense a strong signal, lots of noise is bothersome. I don't want the signal to be lost in the noise, lest I don't act when I should or lose my conviction to previous actions.

Now is one of those times. The signal seems strong--we are headed toward an inflationary crackup. But the noise is getting loud too--stocks hitting 5 yrs highs, sharp cookies suggesting that we're beginning a melt-up period, various economic reports with positive tones...

In the past, I have let the noise get to me. I have reduced or reversed commitments aligned with the signal just to reduce the deafening pitch of the noise.

In all cases, this was the wrong thing to do. Given time, the signal trumps the noise.

What I have come to understand is that high signal, high noise situations are characteristic of extremes and of turning points. The signal is change, the noise is status quo. Unfortunately, the status quo emits a siren song that resonates with our herding instinct.

As such, my evolving approach for coping with situations like the current one is to unplug. Turn off the streamer. Quit watching the P&L. Leave the news flow. Do other things.

Yes, I want to keep an open mind. But when I perceive a signal to be strong, more than anything else I want to trust my judgment.

position in SPX