Ep 110 : Cause and Effect in the Stock Market (The Bigger Picture)

November 10th, 2016

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Hey, this is Sasha Evdakov.

Today we're going to talk about seeing the bigger picture - cause and effect in the stock market.

I think it's essential to discuss cause and effect because it's one of those things that allows you to look at the markets in different ways.

That way, you can see what's going to happen in the future. When it comes to market prices and investing, it's all about understanding the future and your investments grow in the future. Or your projections to come to the forefront.

That's what we're going to cover in this post along with some insights about some of the election things that happen with the cause-and-effect mentality. We're not going to get into the political sense of things.

I'll give you some insight into the cause-and-effect concept that you can also use to learn from the political stance or a view of things.

Disclaimer

Before we get into this, I want to remind you that all the ticker symbols and the stocks that we discuss are strictly there for educational and informational purposes. The reason is obvious. You might be reading this post sometime in the future. And I don't know your risk tolerance or your style of trading or your goals in the future.

All of these things again are for educational purposes. It's not any recommendation to buy or sell any stock or security.

Quick News Before Start

If you're interested in courses, check Rise 2 Learn website and pick your favorite topic. I also would like to do a few live classes, and webinars added to the options course to clear up any questions or problems.

Visit if you are interested in courses

That's my goal, and if you want those webinars, I'm going to do them to answer any questions. Also, live classes on YouTube is something that I have attended to do as well. Doing that kind of courses we can do some trades on a week to week basis, and I can show you my thought process.

Visit Rise 2 Learn and check out what suit you the best and what are the things that are interesting to you.

Let me know what you are interested in, and we can see what we can do in the future. Leave the comment below and tell me what you want to learn. That would give me some further guideline of where to take some additional education levels.

I'm always looking to move things forward and to grow the process and get you to get more insight on how to do things. I think that would be beneficial. And if you're interested in something like that then let me know.

Finally, the last piece of insight is we're getting away from DVDs and physical goods. I've been slowly moving away from that level. I know that we have some military folks that are interested in DVDs and physical products. But some of these lessons are huge.

The new ones that I'm working on are big lessons. And especially as you start looking at some of these more massive courses (The Options Mastery) that we released it's too large to release on DVDs or physical formats.

So what we'll be doing is moving away from DVD formats.

Getting Started With Cause & Effect

Ultimately cause and effect are what you're looking for to see the future prices. In the market you're looking to understand future price behavior. If you don't know what's going to happen in the future, you can't trade. You can't put on a position.

When you get into a stock (Apple, Netflix, Google), you're believing in this company. You might be projecting that they got the new phone coming out, so the earnings are going to increase.

The stock price is going to increase. And therefore when you purchase those shares, you're going to make more money. It comes down to cause and effect. It comes down to understanding that cause and effect.

If you don't know cause and effect in the market and you can't see sit, then it's going to be very difficult for you to be a trader and investor.

Of course, we are wrong at times. We are wrong as traders, and you're going to be wrong sometimes. But admitting those things and making changes to those things very quickly is going to be a lifesaver for you.

As we look at a market, the most significant cause and effect on a simplistic view are it comes down to volume and price. That is the most straightforward approach that I could give you.

Stock Chart - Cause & Effect

If we take a look here on this stock chart (Amazon), you can see the volume. This is the cause, and you get the effect - price.

When we look at these causes and effects, we're looking at a one-to-one relationship. This is not always the case.

It's a good starting point if you're getting started on a cause-and-effect basis, especially if you're younger. And if you're in high school.

I don't know what age bracket you're in watching or learning from these videos. Frequently the older you get, the more aware you get and the bigger you can see this. But I've also seen other people who are 40, 50, 70 years old and still don't get this concept.

It's not about age. It's about seeing the bigger picture. When you look at these prices, and you start evaluating these things, there are multiple causes and effects.

Looking at Amazon, we have a significant drop. Why could this be happening? Well, we know the volume is pretty big. That is the one-to-one relationship. But other factors other causes could also play a role.

For example, Trump talked about Amazon and Jeff Bezos. They have some issues and some tension. They're taxing them and so on.

That could be another cause. There're other deeper factors. When and if you see these things that are going to allow you to see the bigger picture.

It's going to allow you to predict future prices and be on the right side of the trade more often than not. And see the statistical chance and probability because it comes down to seeing things within numbers.

Numbers are your chances and your probabilities of success when it comes to trading. With that concept in mind, let's take a look at a few various issues in regular life — those things you can probably understand better.

If you don't understand the stock market world or terms, it's challenging to apply that to cause and effect.

Real-World Situation & Concepts

I want you to take an open mind first when it comes to these concepts that I share with you. And then we'll apply those to the stock charts and market.

Fist example - Driving 60mph in 30mph Zone

We have a cause of driving 60 mph. And the effect could be a child at risk getting hit. Now there're multiple effects here that could play in. Most people think of it as a one-to-one relationship. They will are great drivers, and nothing is going to happen.

The cause and effect model does not apply. Other people look at this differently.

Your statistical chance starts to increase if you're driving 60 mph in a 30 mph zone with a child at risk getting hit as:

  • there are more children
  • you're in a residential area
  • you're going during the peak hours when children are outside and playing

It may be before dinner and so forth. As these things stack up against the cause and effect also starts to change.

The effect could be different. You might be looking at this effect and saying something like this:

"I might be hitting a child, or I have a higher chance of risk of getting a child hit."

And the other part of you is saying:

"Well, but I get to work faster. If I drive 60 mph, I get to work faster. For me, I get to the store faster. For me, I save time."

This is the way we usually think like humans. It's all about me. It's all self-thought. We're good drivers. That's the thinking and mindset.

However, that's one effect - the effect of you getting to work faster. The second effect is the child at risk getting hit by a car. Different effects could happen.

Of course, there're completely other effects that could happen. You could hit a bump or a post and kill yourself. That's another option.

As you're driving faster (95-150 mph) the statistical chance, the probability and the effect of something happening that's different than what you expect to start to change.

I hope you're starting to see things as you start evolving into things.

Being a New Adopter

Next thing - always being a new adopter (Samsung phone issues). If you start looking at, you're a constant late adopter of different things technologies.

Maybe you didn't know, but I typically adopt things about a year or so after things are released. I don't usually have the newest gadgets. That's not my style.

I like stability. I don't usually have the newest car because you have all these recalls problems and headaches. Then you got the phone, you have got to send it, and it's a lot of headaches for me.

That's not what I want. But you have different effects that come into play. If you're always a new adopter, you're going to have the latest technology. You're going to have a faster phone and the latest technology to experience and get those benefits.

On the flip side, if you were the one who had the Samsung phone, you're also going to be the first one who has a phone problem. And then you have to go to return it, exchange it and find a new phone.

All those things also happen. The trade-off is different depending on your mindset.

Pro-life vs Pro-choice Argument

We've had this presidential election. I'll give it to you the way I look at things. It doesn't matter what your viewpoints are, but here's the cause and effect mentality.

When you look at pro-life people, they're looking to save a life, the child and they don't believe in abortion. This, of course, is a very sensitive topic. I'm not pushing one view or another.

But what I'm saying is that if you're pro-life, you're looking to save that life of a child. You don't want somebody's life to be gone bad. You don't want them to die.

You want the world to continue evolving, which is an excellent positive mindset. On the other hand, you also have a pro-choice. That's also another proper positive mindset where you want people to choose. You want people to decide that if their health is in trouble, you want that choice to be able to get an abortion.

The problem here, of course, is as you look at this as a cause and effect mentality pro-choice allows people to make a choice. Pro-life forces people to continue through pregnancy. Since we are in a pro-choice environment and state, so you're familiar with that.

With pro-life the cause and effect that I see this is again my viewpoint, what typically happens in a pro-life situation or what would happen. Frequently it's the poor who would be affected.

The services would be cut off. Usually, the way that this happens is they revoke things. The government slowly start revoking social services from abortions. Not right away that they annihilate and say, you can't have abortions. It's more along the lines of we're going to reduce funding for hospitals.

Or we're going to reduce practice insurance for abortions and things like that. All those things slowly start to get away. And then what typically happens is that all these services are gone. And usually the poor are the ones who are stuck with bearing the child.

They're the ones who won't have the services. There are the ones that are going to have to get and have that child even if it's against their health. Or also if it's against their body or their wishes.

Whatever it is, they're the ones that are going to have to have that burden. If you're wealthy and if your health is in trouble you will fly to another country where is that allowed to do. And that is how things work in the world.

You have cause and effect on both sides. Having that burden if you're rich, you have that flexibility. If you're poor, you're going to get that burden of following through and continuing with the laws at hand.

I'm not talking one way, or another is better. I'm just stating my cause and effect and what I see in the future as one thing happens.

Gay Marriage Situation

If you look at gay marriage, it's the same thing. There's a lot of people who are against it. A lot of people who are for it.

I look at it in a way that's fine. If you want to get married gay by all means, get married gay — not a big deal to me. If you don't want to marry gay, then don't marry gay. It's a pretty simple concept.

The 3rd Party Candidates

When you get into third-party candidates, you start looking this way. Well, a lot of people will look at this differently. They say their mindset is that way that they think this is a better choice.

They're going to write it in. And that again emotionally is a good thing. If that's what you want to do, by all means, hop out it.

Other people will look at it completely different. They say there's no chance of winning - for that candidate.

You look at it in multiple ways and multiple fashions as you start looking through these things. But what does this imply in the future? This is what we want to get to. I want to share one more thing.

Taxes With the new President

By the way, these are some insights I got from my accountant. It will give you some idea into what's going to happen to your taxes - cause and effect.

Here was something that I posted right from my facebook page. There are some insights and notes directly from my accountant. This is what's going to happen if things are going to play out the way that they should — cause and effect lesson.

This post is not designed for political discussion...

This is what's going to happen:

  1. If you own a small business (S Corp or a Partnership) and enjoy a special tax treatment (no double taxation), that privilege will be gone. Please expect your tax to go up at least 15%, maybe more.
  2. If you are rich - good for you. You will be richer! The highest tax rate will be reduced to 33% instead of 39.6%.
  3. If you die rich leaving behind over $5.43 million, your family will pay no tax! Congrats again, rich people!
  4. If you are poor - brace yourself, you will be poorer because your tax rate will increase via changes towards the standard deductions.

These are what-if modalities and if things play out based on the policies that they're looking to do this is what's going to happen.

We have cause and effect in two ways here. The cause is Donald Trump. And if he continues to pull these things through and move them forward, there will be two effects.

Most people look at it as one effect. But you have two effects. The first effect is you have the rich become more abundant. The second effect is that the poor become poorer.

You have both of these things that will play in your taxes as far as from that initial cost. This is what's going to happen more than likely if most of these rules and laws are going to come into play.

This is what's going to happen. The rich will get more productive, and the poor will get poorer.

If you're an investor in the stock market, congratulations, because people who are investing in the stock market have more money, if you are a regular person that is getting started in investing, it may help you out a little bit. But unfortunately, you're going to take that cut. And you're going to pay more on your taxes. So that's a trade-off depends on your situation.

The final point is, what does this tell you about humans. When it comes to market cause-and-effect and the driving 60mph. Also, gay marriage, pro-life, pro-choice.

What does all this tell you about humans?

I want to share with you one more insight from public comment, so you get some more clues. Here are some ideas from that trader.

This is just a part of the comment:

"Ok, Sasha, I know you read these comments. So I must tell you when you said hold on to a stock for a year to get a feel of it, I laughed inside my head. But after losing a fair of money, I think one needs to be mentally prepared to let ones money float in the market".

If you read that first beginning concept, it starts to give you more insight. What does this tell you about humans?

To me, it tells me this:

  • We always think we are better than we truly are!

And that's the base concept. If you always think you are a better trader and if you think you know more, it's going to be a real problem in trading.

  • Why do you think a lot of teenagers get into car accidents?

Well, they think they're better drivers. They think they know more. But they don't have that experience.

In the market, the same takes place. When you're trading stocks and if you're getting started and your trading 5,000 shares - you probably shouldn't be doing that.

Maybe you only have $1,000, and you're trying to trade the more significant cap stocks. You think you're better than you are, but it's wrong. You're wrong, and you're thinking about it incorrectly. You have to look at it and see what is it that I'm doing wrong.

When I shifted this mindset and when I always started to think:

  • what am I doing wrong?
  • how can I improve?
  • I'm probably horrible at this

Every time I take a trade, I think what if it goes against me. That's what my thought process is. It's not about the future of how much money I can make. It's always what if this goes against me and what if I'm wrong.

If I think about it this way, I become right more of the time. It's a weird way that works because it allows you to see the bigger picture.

It allows you to see the investments differently. When you start being open-minded about these things, positive things begin to happen.

When the market is too far extended more than likely, it's going to pull back. The effect is going to come back because we're too far extended from whatever the cause was.

As soon as you start looking at things this way, it'll open up your trading world. It's going to open up your investing world.

If you start looking at things by the numbers and by the way things work, you will make progress much faster.

For example:

Third party candidate statistically with Gary Johnson, Jill Stein they have a 2% chance of winning the presidential election. More than likely, voting for Trump or Clinton was the way to go. Statistical probability states that way.

They were going to be the winners. Now on the polls, they said Clinton would win, but you can see statistics are not always correct.

You can still play statistics in the market, but you're not always going to be correct. As you start looking at these things as a trader, you're always looking at the numbers. You're looking at the effect that can happen. For many people, this is very difficult.

How Do You See The Bigger Picture?

How do you see the cause and effect? How do you predict future stock prices?

Well, I got to say it's complicated. It's probably the most significant pain you're going to endure. The main reason is that you have to look at yourself.

And tell yourself things like this:

"I'm wrong," or "I'm probably dumb" or "I don't see things correctly."

And that's a tough thing for many humans to say. That's not a thing that emotionally we like to do. But in trading I have to tell you - it's necessary to do this.

You have to look at yourself differently and admit that you're wrong. Ask yourself how can you be a better, safer trader in this position.

Admit that you're probably not as good as you think when you're putting on these 500 shares. Ask yourself how can I be a little bit safer.

When you start thinking like that it's slowly going to allow you to see things differently. Self-awareness is key.

It's important to notice:

  • the way you behave your mindset
  • the way you interact with friends
  • you drive
  • the way that you've spoken in the last five minutes

Remember, self-awareness is crucial. Let's say that you're at a restaurant. Are you mean, humble, or aggressive to the waitress.

Admitting Your Faults - This is How

You have to admit your faults. That's another concept. Where are you bad and where do you lack and this is part of trading.

What areas are you struggling with is also important to admit to yourself? That's what you need to do and what you need to fix. Saying that you're wrong is hard, but it's vital for your future success.

Your goal is to trick your mind into going against yourself. And I know it's a weird thing because there's a lot of motivational books that are saying that you have to believe in yourself.

However, if you're getting started, you need to be humble about how good you are in this business. You need to be honest to yourself.

That's going to allow you to see this bigger picture. It's going to let you see the possibilities of the effect of stock prices.

It means that you're going to be more statistically right on the proper side of the trade.

Cause & Effect on the market

As we move forward, let's do a rundown. In episode #109, I talked about policies expecting that with a Trump victory. I would see the market sell-off.

Here's a screenshot that I did. You can see in the future - this was 11:31 p.m. Eastern Time.

S&P was down 96 points, and the Dow was down about 700 points. In theory, the concept I could say was right. On the bigger scope, also I was wrong. I'm not scared to say I was wrong for the next day, but on the futures, I could say well these things were right.

The fact is the fact. This is what happened, so if you look at the market today, we had one day rally and one-day isolation. Those things one day could be a euphoric state. I don't look at one day as being a trend. This could be some things that are playing out based on trades and the nine-day sell-off that we had. It's for one day.

I look at the more significant scope. On the one hand, this was correct. The sell-off was pretty massive and significant right around the 5% mark that we estimated.

  • Did I know there was going to be buyers in the futures so heavily?

No, I did not because I still expected for the day to sell off, rather than the future. So a future sold off before the day I was incorrect. Those things will happen at times, and as a trader, you have to manage those risks. You need to manage those statistical probabilities and the chances and choices that'll happen.

For me, 1-2 days even a week not always a trend. Usually, with a stock, I'm looking for a second or third day follow through to convince me on that stock whether it's to the downside or the upside.

What does happen to the market with Trump being the President?

There are questions like this...

  • What's going to happen?
  • What do I see as the effect and what are some things that are happening?

Well, financials will benefit. He's looking to raise interest rates in the future, so they're going to make more money.

We also have fiscal dominance, which means spending money. That's fiscal dominance rather than monetary is controlling of the interest rates of the dollar. That's monetary policy, but fiscal dominance is about spending money.

Trump wants to spend more money to get the economy rolling and to get more jobs. That's what he's looking to do or at least what he said. Whether he does it or not, that's a different story.

These are cause and effect things that we're looking at. Fiscal dominance spending more money is what we're looking at. That means inflation, in theory, creeps up, which means higher increases in prices and goods.

Your box of cereal that used to get was big and now starts to compress to smaller things. That's what inflation is. Or bananas if there are 45 cents a pound they're going to be maybe around 65 cents a pound. It's inflation, and that's the way it works. Greenspan today stated that stagflation could happen in the future.

He didn't say that it's directly related to Trump, but he noted stagflation is what he's seeing or could happen here shortly. That means higher inflation, which means the prices of goods will increase. Also, that means higher unemployment, which means more people have fewer jobs.

And slower demand spending, which means people will spend less. These things are what he's watching for, but why does the market move higher?

Well, it's because it's the central bankers' dream. Central bankers vision is simple - more spending money. It's the bankers' dream.

When you look at the market, it is set up for the rich. It is set up for wealthy people and big businesses. And with Trump being in favor of big companies, the market rolled higher. It's one day, but the market still moved higher. Now we're getting into higher levels - almost at all-time highs.

In that case, people start looking at evaluations. They look at valuations of is it worth that much. But when you spend more, the central bankers love it. They love spending more money because they're the ones that are going to win out.

It's All About Big Businesses

Remember the business of trading stocks is set up for big companies. It's set up for these high net worth individuals. If you're a little person if you're a person that's getting started in the market, is against you.

It's set up to take your money - not make you money. And when it's set up like that, that's why it's against most people.

  • Can you do well in the market?

You can. The odds are stacked against you, but you can do well. But only if you understand what you are doing and you're understand investing.

You need to put a lot of time, effort, energy, and see the cause and effect. Also, you need to see what's happening.

  • What could happen in the future?
  • Could we break out all-time highs?

As I start looking at this, I don't know. How about 5000. I don't think so.

Statistical probability tells me, probably not. Especially if you're looking at 5,000, most people would say it's not going to get there within the next year.

If it starts moving and like a rocket ship, you know the statistics are against you. That's why I look at these numbers, and I start compressing them.

I compress this so you could see it visually.

Now we're looking at the market. You think the market in the next year can get to 4,000 or you think it'll drop to 1000. What's more likely, in your opinion?

Here we have to double (to 4000), and here we have to cut in half (to 1000). What is more likely?

I'd say it's more likely to get to 1000. Could we get to 4000? We could, but I suppose it's less likely than getting to 1000.

What if I drop this down to moving 1000 in either direction. You move up to 3,000, or you go down to 1000. You see that we are now at 2156.

Sell-offs are a lot faster than stocks go up because of the emotions and fear.

I would say it's a lot easier to hit 1000 than 4000. You start compressing this and think about which one's more likely.

As you start compressing this further, you start looking at different numbers. You start playing with the projections. We could pump and inflate the economy much more.

People talk about it. There're two approaches and two potential effects as I mentioned earlier or if not even more. But remember what happens. The market doesn't go straight up. You have a period of upward, and then you have a massive collapse.

  • With the new President and more spending could we go to three years another leg higher?

Yes, no question about it.

  • Could it happen for the four years of his term?

Yes. We could go into 2020 up to 2800 around that level. I'd say that's the fair thought process. As I start zooming things in, we're at almost 3000. The market likes to overinflate (rubber band effect).

If we get to 3000, more than likely, we're going to have a pullback. This is a part of the process. This is what happens.

From what Greenspan said we could get into these levels. Central bankers love it. You know how the market gets manipulated through central bankers. They pump it higher, and that's what happens.

They push it higher, and then you get unemployment increases. More people will have fewer jobs. Then it starts to come back, and you get this period of retracement. I don't know how big. You look at the projections, and you see. You take a guess.

Statistically, what is the chance depending on how far extended it goes. You look at the chance. It's just like we talked about the possibility the faster you're driving, the bigger the chance in one way or the other.

Here is the same thing. I'm looking at the chance that this could have come back. It's possible.

Could it be to 2000? Yeah, because if you're at 3,000, you can get a pullback to 2000.

It could happen. But this is what happens, and this is the way the world works. If we pump it a little higher, you're going to get that drop. I still expect a reduction. Whether Trump or Clinton got elected. I was wrong on that for the next day.

  • But could this start to unfold over the next course of a week?

It could, but I don't think it would happen. Because if it did it would have happened the first or second day. Now what I'm looking for is a three to a four-year term of this happening in the future.

Right now, the market will be manipulated from my view over the next three to four years. The market will be managed. It'll be happy in the sense of great for big businesses and specific sectors and bad for a basic general investor. And bad for people who are poor and who don't have a lot of money.

If you're making less than $140,000 a year more than likely, you're going to be paying more money. That's unfortunate for those people. If you're wealthy if you're making over a $140,000 a year you're going to see significant tax cuts. You're going to see a lot of benefits.

Probably the market will rise. But after that three to four year period, the effect of that is you'll still get a pullback.

Because unemployment slowly will start to creep up and rise. Taxes are going to get more expensive for the lower class or for the people who make less money. As that increases, they're going to pay more, and they're not going to have as much money to spend.

Eventually, this is the cycle. This is the effect that happens. Could the economy completely change with Trump?

It could, who knows, but we'll see what happens.

A Short Summary

I hope this gives you some insight into thinking about cause and effect in various ways. The lesson wasn't about politics. If you're commenting to me about politics within the comments, then I know you're still trading emotionally.

I know you're too emotionally attached to one candidate or the other. I'm always looking at the numbers. I'm looking at the chance what's the cause and effect. This is what allows me to see the bigger picture.

Start looking at things in the sense of numbers, the probabilities, and a cause-and-effect. The thing is if you can do that you're going to do well in this business.

It's all about being open-minded about seeing the bigger picture. Think about what's going to happen and the next steps.

Think about what can you project from:

  • a stock projection
  • a shorter term view
  • a longer-term view

As I expressed right here. Shorter-term view we had the pop. Longer-term view sees what do we have depending on your investment situation.

Final Word

I hope that was helpful. Open up your mind if you're not successful. Be open to this. Think about other factors that you are less emotionally tied and how they work.

Focus on the bigger picture when it comes to cause and effect in the stock market. Pay attention to how they project and what happens in the future.

That's what it's about. It's about seeing that bigger picture and seeing what will happen in the stock market in the future.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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