Dec

1

After every big negative move, I receive much mail from propagandists of the end of world point of view, who are hoping to lay a little more foundation for their next foray into the bear side of investments. They tend to have been tapped out, literally or metaphorically, from their shorts, so as not even to be able to assuage a 1.5 percent profit, to offset what would have been 50 percent or so losses on shorts during the last 4 years. In any case, as part of what I consider their propaganda, or their hopeless backing and fillings to gain self esteem and profits*, they have concluded that that the Monday 11/27 down move of 19 points, which is the first large decline of more than 1% in 6 months, somehow this is illustrates that we are entering a new and bearish regime — or that the Plunge Protection Team has now has lost their mojo.

The essence of the post is:

It has been 917 trading days since we have had a 2% down day at the close. This is 6.13 standard deviations from the norm, and the second longest streak since 1942. The odds of this happening without the Fed’s intervention is one in 86,579,799.

There are so many things wrong with this point of view, especially at the most practical level on which it precludes the taking out of the canes just as they are most needed, but it also involves the misleading throwing around of misplaced technical terms, like standard deviations computed in a fuzzy way and slippery time schedules, and a poor imputation of motives behind the numbers.

I felt it was a good thing to share this so that good readers can be alert for it in the future, so that they can avoid derivative propaganda techniques that they may have been inadvertently exposed to through previous communiqués of a Elizabethan nature, and so they can teach their children how to avoid propaganda in the future.

* This is unlike the ghosts of Wall Street past, who frankly acknowledged their misfortune and scratched rich members on the back with tips of impending doom or mergers at Trinity Church, in exchange for a lunch.

Barry Ritholtz comments:

I enjoy your site and writings, and I wanted to bring to your attention some issues you may have overlooked regarding “XXX of days since a Y% correction.”

To begin with, your initial premise is factually wrong: those comments were posted on November 22 — prior to Monday’s 11/27 2% Nazz drop. This was not an after the fact rationalization, but rather, (someone else’s) interesting observation as to how long it had been, (I don’t know who wrote it).

Second, I neither endorsed nor disputed it, but threw it out there — it was an email circulating trading desks, and I thought that alone was interesting and curious.

Third, if you go through the reader’s comments on the post (I encourage broad debate on the site), you will see our cadre of mathematicians do a nice job taking apart the weak stats work. I have no idea how someone derived such precise odds — 1 in 86,579,799 — but the crew debunked that pretty quickly.

Next, people can argue all day long about the plunge protection team — My take is they do a lousy job. Perhaps the 78% drop in the Nasdaq from the 2000 peak to the 2002 low could be considered proof of that. Sure, there may be interventions occasionally, but ultimately, Mr. Market will determine for himself where he wants go, and there’s nothing a handful of Fed and Treasury officials can do about that. Oh, they can move things around short term. And Goldman Sachs, with their shift in the GSCI, and the subsequent drop in Oil/Gasoline, certainly was a factor in lighting the fuse this July of this rally. But in the end, the market will do what it needs to do — in both directions.

Lastly, as to losing profits / rationalizing bad shorts, I have been cautioning against shorting into the momentum strength and up trend of the market since this rally began. Tops — if this is one — are processes, and traders are much better off being late to short once the reversal is clear than being too early.

The Dow Transports divergence has gotten our attention, but it is only one signal, and insufficient to aggressively go short. After Friday’s lower intra-day low relative to the Monday drop, I did put out a small short (Qs and IYR). Nothing huge, just a placeholder in case Monday morning gapped down. This is our first short since May of this year.

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