Recency bias is a common behavioral phenomenon where we tend to pay more attention to more recent data. To take a step further, we often assume that whatever has happened recently (for example, a series of up days) will continue to happen.
Take Facebook for example. Since bottoming at year end, 13 out of 17 days the stock closed higher than the previous day. Bright green on your screen, pat yourself on the back, great position. We even had four consecutive strong up closes leading up to last Thursday. Then we have the last two days, with lower closes. Panic! Chart below.
Why does it feel so scary for a solid performer like FB to go down for a couple days? Because of the recency effect. We're primed to expect a good stock to perform well. And we expect that an uptrend will persist. We also hear things like "Tech Stocks Tanking" when they're down 100-200 bps or so.
So how do we deal with the recency effect as investors? Keep an eye on the big picture. The last couple days, the last couple weeks, the last couple months are all small movements within a much larger trend going back to 2012.
Remember that one of the great benefits of technical analysis is to understand the long-term supply and demand picture. Uprtends are a series of higher highs and higher lows. All is well.
See previous post on SPX and stall speed. Plane has now buffeted and the nose is dropping down. Ease off on the yoke!
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