Sunday, September 06, 2009

A Spiderman Market

Tim Knight has a terrific post on lumpy returns. I can attribute my own performance to particular positions in particular trades that paid off handsomely.

What makes our participation in the markets difficult, I think, is that to be successful, we really have to come to grips with how to fail. We do not approach most things in our life (relationships, education, careers, or something so mundane as driving) anticipating failure (unless we suffer from some psychological condition). If your driving record (# of acidents transactions) was anywhere close to the failure rate of even the most successful of investor (# of losing trades), then you'd likely be uninsurable. You may not know this about insurance: high frequency of small losses will likely land you as being uninsurable.

I was listening to Tim Wood yesterday on Financial Sense online. He's a Dow Theorist, and he is indicating that there is Dow Theory buy signal, and Richard Russell indicates same (but Russell thought we were embarking on a new bull market last July or so).


Everyone has fancy charts about this and that. There are plenty of reasons to be believe that the market will go down. All of the bad news is rather proliferate. Perhaps that widespread knowledge of all the economy sludge is just what is the wall of worry here that the market is scaling with the confidence and alacrity of Spiderman. Here's my modest thesis on why the market may just continue to go up in the short term whether or not there is a Dow Theory Buy Signal or Not--but first a chart. This is a Renko chart using weekly numbers. It's a forest-not-the-trees look.

I must say, that this chart easily could break down perhaps more easily than it could break up. Here are a few things to consider:

1. The volume, despite much grousing to the contrary, is pretty darn robust to my eye. Forget about green shoots; look at the green bars (bottom of chart).
2. There is a p/v void just above the levels that we are now (highlighted in yellow). Means to me that there is not much resistance--but you know that I don't hold myself out as a great technician. I'm just a simple girl with simple charts.
3. Emotions always trump fundamentals in the short term (fundamentals always win in the long term!). Accordingly, I believe the following reasonings have some merit
  • this rally is not believed in and widely believed to be a bear market rally. [I do believe it to be such.] The trick here is to really know what the real contrarian thinking is: that it is a bear market resumption OR a new bull market. I don't know the answer to that--but I do know this--that what people say and what they do with their money are two different things.
  • Seasonal factors (the negative connotations) are so darned widely accepted, that I believe that MOST believe that the rally is running out of room due to the dangerous waters of SEPT/OCT; and it is inevitable that the market will fall here. (also see above).
  • IF the upper level on the chart is breached, it will potentially create a monstrous buying/short-covering panic that could take us well into the yellow highlighted area. September is also the end of the quarter which lends a wee bit of credence to this.
4. Lastly: The fear of being left behind is the most powerful and dangerous emotion there is. Has that fear already manifested, and the chart is merely reflecting that? The answer, my friends, is the key to navigating this juncture successfully. If I told you I knew, I would be lying.

I still do not believe that the FINAL bottom has been put in this market, because of this: we never failed to get upside on good news. We did finally stop going down on bad news, but to get the monstrously good bottoms that Napier talks about, we're not quite there.

I had this "what if" epiphany just now as I write...What if March was the final bottom (notwithstanding just what I said above!) in the one-two punch of October (1) through March (2)? God, the more I write, the more confused I get!

But that is really the point of my writing about any of this, and why my blog is so named. I'm a nobody, I do not mind looking like the fool. I would be doing you a disservice, though, if I didn't put up this chart and my comments because I do believe that they are important considerations in managing risk.

In business, you create models that purportedly assess risk. You create Scenarios 1, 2, 3 or what have you and the you assign a probability to those outcomes. Voila! Out comes an expected value based on a probability distribution. You parade it about, it gets vetted and ultimately the organization bets its capital dollars on that.

In truth, there are three problems with that:

Problem 1: You may not have considered all of the scenarios, only the one's that are most evident to you (and to your audience--the people who will vote your proposal up or down).

Problem 2: Your assignment of probabilities is based on what? Well, it's generally based on how much you want or not the outcome. Hmmmm, my expected probability does not meet the threshold, what happens when I tweak the probability of Scenario 2....Oh!!! That's more like it. Your pass/fail test is met. Confident?

Problem 3: It's the obvious one. There is only one outcome--and it may be materially different than what you anticipated. Relative to your expectation (and all of the fallacious but seemingly logical reasons for having those expectations) you may have much reward or much loss as a result.

Why does anyone go through that? Because it is the only thing you CAN do. For all of the endemic problems with that process, you ultimately have to have a framework for making a decision. And though your scenario creation and your probabilities might be fallacious, you've committed to pen and paper what your expectations are. Businesses cannot predict the future. Market pundits cannot predict the future. Economists or government officials cannot predict the future.

But while none can predict with accuracy the future, each of us has to make a decision about it--prepare and position ourselves for it with some model that makes sense to us, and takes into account our risk considerations. And when the model proves that the future does not meet our expectations, then we must think, revise and recast all the while being mindful that we may be wrong some portion of the time. And, when (not if) we are wrong, we've not done irreparable harm to our finances, our body, relationships or things (home, car etc). It's a dynamic process--not a static process.

All we have is our expectations for the future, the points on which those are based and the reassessment of those expectations as the fullness of time unfolds. So Spiderman climbs the wall until. . . . it makes interesting reading, which is why Disney bought the franchise, and why we have 24 hour financial news networks!


katzo7 said...

Nice thoughts Leisa. I think this Labor Day holiday had interfered with the direction somewhat and we will be able to get a truer read this week.

viscous said...

Nice post Leisa. I’ve been pretty busy the last few days; as a result, I haven’t been able to stalk you as much.

viscous said...

I'm now in stalking mode. :o)

Leisa said...

K - Thank you

V - Thank you. You know what my Disqus avatar is capable of?