The Psychology of Why I Went Short on Election Day

As a former psychologist, market sentiment (a lot of which I can sense through twitter) is one of the things that I consider when making trades. Recently those of us that trade the charts haven’t had strong conviction as to whether to be long or short. Many of us have stayed in cash or made quick tactical trades while we waited for a more clear market direction with the hope that once the election was over things would become more apparent. One thing that I noticed on twitter was the tremendous support for Mitt Romney and the hatred of President Obama. I should point out that I use twitter solely for trading purposes and not personal ones; thus, all the people I follow are in the world of stocks. As someone who is very observant, I noticed quite a divergence in the kind of rhetoric over Romney on twitter as opposed to the outside world I connect with. To me it seemed obvious that Obama was going to win the election. Knowing that people are bias and have a hard time believing their thesis could be wrong I knew that many stock traders would be thinking that Romney really had a good chance. On top of that, Romney fans were seeing a constant stream of Romney support from other traders.

I used that information to my advantage. I noticed that financials, such as GS were making new highs, which confirmed that traders really did think Romney would win. With so many traders really high on hopium and my belief that most of them were not taking a bigger picture view of the voting population, I went short yesterday. I figured with the recent market rotation and the many divergences we were seeing, once traders were faced with the facts there would be a major sell off. The point of me writing this is not to toot my own horn as I have taken many losses in my time as a trader. Rather, I want to help other traders by reminding them that if you surround yourself with like minded people, don’t let yourself forget that there is a lot more people that likely are not of the same mind-set. Those of us that trade stocks are a select bunch. Try to keep that in mind the next time an event comes up where decisions will be made that affect the entire population and every stock trader is on your side.