Probabilities>Predictions

Is today's huge lift good news or bad news?

During the month of December the US stock market has gone on a pretty wild ride. It is times like these that investors are at greater risk of succumbing to emotion and making a mistake. As such I've shared some of my thoughts with friends on Facebook (my Facebook page is more of a personal thing as opposed to a business thing) with those posts drawing some interest.

One of the things I've learned from John Hussman is to view things in terms of increasing or decreasing probabilities as opposed to trying to make predictions. He looks at various valuation metrics and draws conclusions about the likelihood for favorable or unfavorable returns over some period of time. I use probabilities a little differently as long time readers might guess, if the S&P 500 is below its 200 day moving average (DMA) then I take that to mean the probability of a bear market has increased. This is by no means a certainty and I don't represent it as such. Over the last few months I have chronicled what I have viewed as an increasing probability of a bear market as conditions deteriorated.

In this very volatile back and forth environment I think the probabilities favor going against the grain somewhat. In line with going against the grain, on Monday I disclosed buying a broad based ETF in my personal account (I have too much cash accumulated) due to a different set of probabilities, that the market was extremely oversold by quite a few metrics including that a/o Friday the market had dropped 11.5% in 12 days (per a tweet from Eddy Elfenbein) which created a probability of a short term bounce, albeit in the context of a bear market. Also I long ago said my first buy would be down 20% from the high so it was important to stick to that.

In the last couple of days, several of my Tweets and Facebook posts have focused on whether or not there has been capitulation. I think a huge flush down at the open would have been capitulatory, I don't think the trading on Monday, starting out ok and then deteriorating into the close, was capitulatory. I may be wrong but for now this is unknown. Sticking with the idea of probabilities, it is unlikely that this event is over but it would be great if the S&P 500 rocketed to a new high with Monday having been the low. None of this is a prediction, the more likely probability is that this event isn't over. A pretty good rally is very plausible and maybe that is somehow actionable for you, it would be for me if it happens but I don't know yet and that is the point.

Part of successful investment management is being ready for various outcomes in terms of being prepared to trade when that is appropriate and being prepared to give yourself a pep talk when emotions ramp up. Having emotions is normal, it's when people succumb to them that they get into trouble.

A little more on the futility of predictions as captured in this table Tweeted out by Carl Quintanilla earlier in December. For now it looks like theses guesses will be very wrong.

In the past I've referred to my time at Fisher Investments and how they viewed the strategists' predictions. They noted a general tendency for them to all gather in similar ranges every year and around 10-11% every year. Right on cue the Barron's 2019 outlook is looking for about 10%.

So is today's huge lift good news or bad news? I don't know but the probabilities are that it isn't so great. The anchors on CNBC were gushing about the huge gains and I would go against that grain too. The largest daily gains occur during bear markets. The oversold nature of the market was not sustainable, these types of fast but partial snap backs are normal bear market activity. Again, if this is not a bear market, that would be great but don't be surprised if this snap back stalls out at some significant, technical level and then goes back down. Not a prediction but a probability that is worth preparing for so that you don't succumb to emotion.

Comments


rogernusbaum
Editorrogernusbaum
rogernusbaum
Editorrogernusbaum
New Comment
1
rogernusbaum
Editorrogernusbaum
New Comment
1
rogernusbaum
Editorrogernusbaum
New Comment
rogernusbaum
Editorrogernusbaum
New Comment
rogernusbaum
Editorrogernusbaum
rogernusbaum
Editorrogernusbaum
New Comment
rogernusbaum
Editorrogernusbaum
rogernusbaum
Editorrogernusbaum
New Comment