One-Day Wonder or Key Turning Point?

Overreliance on Recent Data

Investors in general, and human beings in particular, have an awfully poor understanding of the concept of time. Part of that is due to the fact that time is merely a concept, like truth or justice and the "American Way," as opposed to being composed of atoms or waves. It's not all that easy to wrap your brain around.

The other aspect to this is that as a species, we have developed to respond over the years to much more immediate needs and threats: finding food and water, seeking shelter, outrunning Mastodons.

Investors are no different. The lack of temporal comprehension manifests itself in several ways. The most obvious is the overemphasis of the most recent data in a series. RealMoney contributor Paul Kedrosky has recommended Thomas Gilovich's book: How We Know What Isn't So, and I second that. It's a terrific read for investors on why our analytical engines (large mammalian brains) are so very flawed. I defy anyone to read this book and not come away with a healthy new respect for our many blind spots.

But the more significant temporal problem investors run into is contextual: Where do we place data or events into the grand scheme of things? Is the most recent data point a short-term, intermediate-term or long-term phenomena?

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In my opinion, that's the big issue that is causing so much confusion at this point in the market cycle. All the short-term bullish forces -- put/call ratio, Arms Index, VIX readings, low bullish sentiment -- have been bumping up against much longer-term bearish ones -- most notably, inflation and slowing GDP. That's why traders have been having such a difficult time grappling with all the cross-currents.

Investors face unique challenges when trying to balance these competing, and often contradictory, time frame issues. My solution is to mate a technical perspective with macro-economics. It's helpful in placing shorter-term timing issues into the context of longer term.

Having an objective way to do that is one of my keys to investing success.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].