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‘Tis the Season To Be…Watching Holiday Sales Performance? What Traders Really Think – and Do

Headlines about Black Friday and Cyber Monday seem like a distant memory but the holiday shopping season is definitely well under way. Although there was a dismal turnout on Black Friday and more shoppers but smaller transactions on Cyber Monday, overall sales in Q4 are expected to rise, and we saw promising spending data on Thursday, along with a positive market I wanted to examine how the attention to the annual consumer shopping frenzy impacts the trader psyche. Do traders think it is all hype? A mildly interesting indicator? And, most importantly, is this something that actually impacts their trading decisions? To find out, we went directly to a group of Schwab’s Trading Services clients.

Curiosity trumps analysis

Do traders even pay attention to holiday retail sales? The short answer is yes, most clients we spoke to do pay attention to some degree. Granted, several said it was nearly impossible not to take notice given the amount of media coverage. The general consensus we heard is that this is one gauge of general consumer sentiment and the overall economy.

Sample responses from those that do pay attention to retail performance during the holiday season: 

The way retail goes, so goes the economy and the market?

So traders pay attention, whether they want to or not. But does the outcome have any bearing on their confidence in the overall marketplace? Our clients were more split down the middle on this point. Although many believe the economy is much more than holiday sales and that it isn’t nearly as big of a deal as it once was, the majority say it is one of many indicators that helps inform their market outlook.

A sample of what traders have to say about holiday sales and their confidence in the overall marketplace:

Do Sales Translate to Trades?

Traders take note of holiday sales, but the real question is whether or not it leads to any action on their part. And here, we heard a resounding “no.” What did they say? See for yourself:

A sampling of traders weighing in on whether they make any trading decisions based on the strength or weakness of consumer holiday spending:

Traders clearly watch holiday shopping data to some extent, but that doesn't directly translate into trading decisions. And that is what I like to hear – these clients are engaged in the markets but aren't letting headlines or hype around one market event trigger rash trading decisions.  Only time will tell if the holiday spirit will translate into more dollars spent, but that is just one small piece of the overall picture that we’ll all be watching as we look ahead to 2015. If you’re interested in what Schwab’s experts think about what the next year holds, be sure to check the 2015 market outlook from the Schwab Center for Financial Research.

Enjoy the holiday season!

(1214-8452)

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Despite a Belief to the Contrary, Traders ARE in the Game

The story was the same through the summer: markets continued to hit new highs and, with few exceptions, volatility remained low. And individual traders just aren’t trading as much. Retail daily average revenue trades (DARTs) are down and there is the permeating belief that because they aren’t trading, they must be on the sidelines – either regretting their decision to wait out this bull market or unengaged all together. This is the logical conclusion, right? Not so fast.

Despite industry wide trading volumes coming in near five-year lows, the truth is that retail traders are in the market. They may not be trading a lot, but that doesn’t mean their heads – and dollars – aren’t in the game. First, bullish sentiment among traders remains high – despite geopolitical pressures. Just last week, Schwab polled a group of traders in our Prospect Trading Community[1]  on their outlook for the next three to six months. While 44 percent of traders say they have a bullish outlook and 45 percent say their outlook is neutral, perhaps what is most telling is that only 11 percent say they are bearish.  And, in a separate poll[2] conducted at a Schwab Trading Services event on September 10th, 53 percent of traders surveyed say that the markets have exceeded the level of performance they expected at the start of 2014.

We also asked traders to name their primary macroeconomic concern around investing in the stock market right now. And do you know what is notable? While we saw a small spike in concerns about Fed actions in the days ahead of the September Fed meeting, nothing stands out significantly. In other words, even though there are global and economic pressures facing the nation, there hasn’t been one clear force driving fear into the market for quite some time.

But have bullish outlook and the lack of fear actually translated to market participation? We think so. First, Schwab retail clients were net buyers into the market in the second quarter. But perhaps the most notable evidence of this is that cash balances as a percent of total assets among individual investors have been steadily decreasing across the industry. At Schwab, cash balances as a percent of total assets declined from a peak of about 20 percent in 2009 to 11.9 percent at the end of the second quarter. 

While some of this fluctuation could be due to seasonal influences, data show that people have been buying in during market dips – and then holding on. In fact, portfolio turnover has steadily declined among traders throughout 2014. In August 2014, average portfolio turnover was 11 percent compared to 16 percent in January 2014.

* Average turnover = Minimum absolute principal value of Buy and Sells divided by Beginning of Month Retail Statement Equity

Throughout the summer, clients were calling Schwab reps to discuss how to gauge market entry points. Clients who were heavily invested already told us they were in a holding pattern in anticipation of additional returns.  They have been seeking out education, as shown by a 44 percent increase in online educational usage.  And, clients are looking forward.  Forty-six percent of our trading clients recently surveyed told us their goal for the last quarter of the year is to refine their trading plan for 2015, and another 32 percent plan to educate themselves even more on trading and investing.

So are clients less engaged with the markets?  We think not, as our clients’ behaviors are telling us a different story.  They have a bullish sentiment, and they are invested in the markets, educating themselves, and looking forward.  Not only are they in the game, they are getting ready for what the game will hold next year! 

Disclosures

The information provided is for general informational purposes only and should not be considered as an individualized recommendation or personalized investment advice. Investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Any opinions expressed herein are subject to change without notice at any time.

Investing involves risks, including loss of principal.

Past performance is no guarantee of future results.

©2014 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (www.sipc.org).

(0914-6356)

[1] Schwab’s Prospect Trading Community consists of over 200 active traders that are not clients of Schwab, representing a broad range of online and full commission brokerage firms. 

[2] Trading Services Sentiment Survey, September 10, 2014

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Conquering Emotion in the Market

The whole idea that the stock market reflects fundamentals, I think, is wrong. It really reflects psychology.  – Nobel Prize winner, Robert Shiller

As a psychologist by training, I couldn’t agree more. Humans are very much guided by their emotions. And sometimes that’s a good thing. Enthusiasm is also a good thing.  It drives us to learn more about what we’re passionate about, sometimes to the point where we insatiably consume as much information about it as possible, as if it fuels our very existence. For investors who are passionate about trading, managing emotions – and productively channeling enthusiasm – can be a challenging obstacle on their journey to grow as a trader.

I oversee the client experience for the individual investors at Charles Schwab who trade most frequently. For many of these clients, trading colors the lens through which they view the world.  Of course their ultimate goal is to make money, but they also often view trading as a challenge to be mastered. It is a source of pride and enjoyment.  But as we all know, it isn’t easy. If something is happening in the market – or if something isn’t happening – traders question themselves. Should I buy? Should I sell? Am I protected if the market turns? Did I just miss an opportunity? If I stick it out a little longer, won’t I make my money back? On an intellectual level, most traders understand they should let profits run and cut losses early. But that is so much easier said than done! The reality is, when your money is at stake, emotions can get in the way of good decision making. So what can traders do?

The answer sounds deceptively simple: create a trade plan – and stick to it. 

To take a step back, a trade plan is a thoughtful, deliberate approach to trading where an investor establishes a process for evaluating opportunities in the market with preset criteria for buying – and perhaps more importantly – selling. When devising a trade plan, it’s important to find a method that works for you. It needs to fit with your temperament, long-term financial goals, and other life commitments.

How can you get started? The most important aspect of creating a trade plan is determining your near- and long-term goals. You also need to be honest with yourself when evaluating your risk tolerance. In other words, how much of your portfolio do you want to make available for trading?  We typically see our more active traders deploy around a third of their portfolio to trading, which may be high for other investors.  How much are you willing to risk on any one trade? Once you’ve laid this foundation, you then take small steps toward achieving your goals by giving careful and rational consideration to the types of securities to buy and how you’ll research and evaluate trade opportunities. You’ll also explicitly define your target entry and exit points – before placing a trade.

Many traders I talk to believe that trade plans are an antidote for curbing the emotional impulses and reactive behavior that characterize highly volatile markets. So, you may be wondering if a trade plan is even relevant in the ascending, lower volatility markets we’ve seen of late.  I can’t emphasize enough that a trade plan is just as important in sideways or less volatile markets. In the current low volatility climate, it is common for some traders to start to speculate that a downturn is imminent, and then they make rash decisions based on that fear. Or, I also see traders try to create opportunities where few may exist, forcing something that may not be there. And, another common misstep traders make as markets continue to reach new highs is they take profits too soon. Let’s face it; it’s hard not to cash in.

Do these sound like familiar struggles?

I am a firm believer that a well-thought-out trade plan is essential to removing emotion from decision-making equations in all market environments. That said, a trade plan needs to live and breathe and you need to make adjustments during periods of lower volatility. Specifically, you may want to:

Reassess your profit goals. Keep your expectations realistic about price moves for the positions you’d normally take.

Reevaluate how much money you’ll put into each trade and your target cash holding. When markets are at record highs, you may want to consider increasing your cash position slightly so you can redeploy it during a pullback.  Set your targets for when you will redeploy this cash ahead of time. 

Devote more time to research. You may have a little more time to dig into specific securities, trading strategies and even new research sources, since less trading may be required in a low volatility, slowing rising market. 

Track your performance. Tracking results should always be a part of your trade plan regardless of market conditions. But I always like to remind clients that they should keep track of not only when they entered and exited positions, but also what they were thinking and feeling when they did so. These insights can prove to be very valuable learning experiences down the road.

We are all human, and humans are emotional creatures. This will never change. But, you can learn how to manage emotions effectively as you learn and grow as a trader. So while your emotions may run hot and cold as the winds change in the market, creating and following a trade plan can help ensure that your trading behavior doesn’t.

If you’re interested in learning more about how to develop a trade plan, check out:

Stay on Track with a Trade Plan

Simple Steps to Developing a Trading Strategy

Trader Q&A: Stick to your Trading Plan to Avoid Bad Trades

  Additional educational materials for traders can be found on Trading Insights hub on Schwab.com.

(0714-4722)

Disclosures

The information provided is for general informational purposes only and should not be considered as an individualized recommendation or personalized investment advice. Investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Any opinions expressed herein are subject to change without notice at any time.

Investing involves risks, including loss of principal.

Past performance is no guarantee of future results.

©2014 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (www.sipc.org).