In mid-July
2007, the Dow Jones index made what appeared to be an important
top, as you can see from the chart below.
Naturally,
this gave rise among the usual TV pundits to pessimistic
perceptions of the US economy, the long-term impact of the war
in Iraq, and so on. However, what is fascinating and even mildly
annoying is that just a week prior, when the Dow Jones broke to
new all-time highs on July 12th, the analysis could not have
been more euphoric. At least one economic commentator could see
the Dow many thousands of points higher by year end.
So, where is
this guy hiding now, especially in light of the US home loans
crisis that came to the surface a very short time later?...
All of this
demonstrates the fickle nature of those who try to forecast
stock, currency, commodity and bond market movements using
purely economic arguments alone. During my time on the floors of
major investment banks, these characters were a constant
irritation to me, not least because of the worship the entire
industry unfailingly pays to them. It seems that in this world
you get eternal credit for SOUNDING as if you know what you are
talking about, regardless of whether or not you actually do!
However, the
proof of the pudding is very simple: how accurate are they?...
The answer is,
not very. In fact, I am reminded of an old adage from Elliott
Wave theory which states that when everyone is madly bearish,
the market is probably making final BOTTOM. When everyone and
his brother are wildly bullish, so much so that even the
restaurant waiter is checking his stock portfolio, you know
you’re close to final TOP!
This unlikely
advice is astonishingly accurate. In fact, I remember once
buying a new home based partly on this perspective. So, this
isn’t just a fancy theory. I’ve actually profited from it in
real life.
The essential
problem is that these economic pundits are providing reasons
AFTER the fact for why the market has done what it has already
done, and they always look good riding on a trend that they
imagine is likely to carry into the future. However, what most
uncritical people fail to realize is that there is no empirical
PROOF for anything these jokers are saying. In other words,
there is no evidence that the market moved BECAUSE of the
specific factors that they discussed! Where’s the proof of that?
Answer: There
ain’t none!
The stock
market or forex market moved, and afterwards they
said something about what they believe to be the causes.
However, there is not necessarily any connection whatsoever
between the market’s actual move and the causes they cite.
This is why
the technical analysis approach is always superior and far more
accurate than the best economist can ever be. It makes no
pretentious claims about the “why” of market movement, but
simply tells you, from the point of view of probabilities, what
the market is most LIKELY to do. Almost invariably, a good
technical analyst can tell from the charts that the market is
about to make a top or a bottom, and they will tell you so well
in advance of the event. They will then observe to their chagrin
and annoyance, as I have had to do on countless occasions, an
“expert” economist explain the “reasons why” the market made
said move.
And who sounds
the most impressive and gets the most credit in this screwed up
world of ours? The guy who actually told you the move in
advance, and maybe even traded it, or the guy who comes on AFTER
the move has happened and spouts a bunch of complex-sounding
fancy words and theories?
I’ll give you
a clue: it’s NOT the first guy!
Of course,
said expert can never call the moves in advance, but they can
always explain them with extreme eloquent after the event! They
make their careers on the fact that the human mind has this
ferocious need to know WHY, even if there IS no overall single
why to be found.
This is the
topic for another article, but in brief we can say here: the
markets are far too complex and multi-variable, and at motion
simultaneously in a whole range of different timeframes, to
ever be reduced down to a few handy formulas such as inflation,
budget deficit, interest rate expectations, home loan
mortgage crisis, or whatever.
Certainly, the
financial markets may use some of these factors as an
EXCUSE to do what they were going to do anyway (and it is the
technical analyst, studying the charts, who is going to make the
forecast in advance of the move, not in retrospect). However, to
suggest that there is a simple cause/effect relationship between
what the financial markets do and what economists imagine
in their tiny minds are the reasons is frankly laughable, if it
were not so dangerous.
Here is the
danger, and it is one that the trader can all too easily fall
into: the danger of believing in it!
In this modern
age, we are deluged with information, and so it is critical that
we pay attention only to information that is valuable. The
latest ravings of your Johnny-come-lately TV economist are NOT
accurate information as far as forecasting market movements is
concerned, or even understanding past movements or current
trends.
Again, the
reason why is that there is no empirical proof that all this
expert sounding blah-blah has any connection to reality
whatsoever. The fact that it sounds good does not make it good,
or even useful. What you need as a trader is a methodology that
has proven itself over the test of time, not just another blast
of hot air.
Hence, the
trader should be very wary of what he/she lets into the mind and
allows to influence trading decisions. You might find yourself
over-riding your own impulses, or even your proven trading
system, because of something some idiot said on TV! You then
have plenty of time to regret it when your original impulse
proves correct, but you are not in the move, thanks to some damn
economist!
Listen to this
and listen good: You’ve GOT to cut the BS out of your trading
process!
So, if you are
prone to listen to these clowns, take a good hard look at
yourself and what you are doing. How often has this additional
so-called information actually helped you profit in trading, and
how often has it confused you or caused you to lose? Be very
cold-blooded about asking yourself this. I think you will then
see the brutal truth of what I am telling you!
In conclusion,
don’t try to “understand” the underlying causes of market moves
because they are essentially beyond human comprehension. If you
want an equally futile task, stand outside on a windy day and
try to “explain” the specific fundamental causes behind each
gust of wind that strikes your face. Instead of trying to
understand, or trying to use such arrogance as part of your
trading method, instead work upon a method that forecasts
stock, bond or forex market moves based upon sound
principles that repeat with high probability.
You will
almost certainly achieve the latter through a sound
understanding of the technical factors associated with
financial market price charts.
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