Dec

20

CountingEverywhere I go, everywhere I turn, I am beset by people who believe this is the time to get out of the market because it looks bad. They have many reasons for feeling things are bad. The latest is a spate of forecasts based on inefficacies of the central banks, solar spots, and likely changes in pessimism. I would urge those who have given up the quantitative approach to come back to their roots, realizing the following:

 1. When the market looks bad, it is more bullish than when it looks good, e.g. after a series of down weeks.

 2. When there is a 10% a year drift, you have to overcome above a 1/2 point a day drift for each day that you're out of the market. If on average, you're out of the market for 60 days, while things look bad, that's 2% you're giving up.

 3. In order to time the market you have to find a time to sell and a time to get out. If you time it by getting out when the market moves X% below a Y day moving average, and get in on the reverse, you'll have the worst of all worlds quantitatively.

 4. When the market is down, of course the news is going to be bad. But is that good or bad for the future? I don't believe the news is worse now than it has been on other occasions where the market is down 5% in two weeks or so, and if it were worse, I don't know if that's bullish or bearish, except for what happens when such occasions occur without regard to any Monday morning quarterbacking.

 5. The forecasts by the big houses of up 10% to 15% based on the differential of the earnings yield and bond yield have been extraordinarily accurate on a prospective basis over the last 15 years as witnessed by the work of the Spec Duo and Mr. Downing on this front.

 6. If you return 14% a year for 10 years you'll end up with 2.5 times as much money as if you grow by 4% a year, and five times as much after 20 years, And that's the underlying compound interest factor that makes the differential return models work. That kind of difference is impossible to beat on a 20 years (or a one day) basis with consistent trading. Keep that in mind as you consider stocks versus bonds.

 7. Especially toward the end of the year, reversals are most prevalent and predictive, with work on individual stocks often showing that those down the most in the last quarter are up significant double digits in the first part of the next year. Is it time to get them now, or to wait until things look good?

 8. After years like 1907, which this year is so reminiscent of for some sectors, what happens the next year?

 9. When considering the hornet's net of worries that the stock market has been exposed to each year over the last 100 as we have documented on Daily Spec, are these troubles that much more significant? And if they are, have they been discounted, and what happens when troubles are more or less than usual relative to the market move? A quantitative approach here would be apt.

10. The market's been more volatile during the last two months in terms of ranges and big moves in an hour than ever before. Is that good or bad?

Before giving up the quantitative approach for a cyclical view of bull and bear markets and hoping that you can time them, I would encourage a little counting.

Alan Millhone remarks:

MoneyIn 2008 I will come into some money (not exactly sure how much) and plan on opening a growth fund for my two younger grandsons (ages 8 & 11). This is money I would not normally have on hand. I have been reading all the Daily Spec postings and learning about the Market Mistress. There is no better place in the world to live than America. Yes, this country has a lot of problems, but what country doesn't? If you have no faith in our economy then you need to crawl into a hole. American has always recovered and rebounded and opportunities will always abound for making money in the land of milk and honey. What other country can change Presidents and keep going strong without missing a beat? Victor's posting makes a lot of sense and is excellent food for thought. Currently bank CDs pay around 4.75% to 5%. There is a lot of turmoil at present and likely always will be. We all know that a new President won't be able to change all that much. So we forge ahead and work with the tools at hand. I am a dyed-in-the-wool optimist with respect to investing in America.

Anatoly Veltman extends:

GoldI am a die-hard value seeker myself and Victor makes a point dear to my heart. There is one caveat, that I feel is applicable to the current environment. We (more to the point: equity markets) have enjoyed the longest period in modern history, of (at least, we were told) subdued inflation. What if that changed? Then operating margins would suffer.

I got the hint that something is going amiss when my indicators on XAU, GDX, ABX, NEM all flipped into down-trend a week ago, while the same Gold Cash and Futures gauges remained in up-trend.

I scretched my head; then PPI and CPI came out and it dawned on me: traders in-the-know held on to the bullion, while getting rid of their ownership in operating concerns! And the Fed will have a job cut out for them, to reign in inflation's ugly head.

Now, since I feel a lot of the Gold Stock move has occured (gosh, GDX is down 21% in a month!), I'm trying to get short stocks that haven't fallen as much yet. Also, Gold should correct somewhat. And Platinum traded $1,529/oz record this morning, not far off my calculated $1,552 target — it should technically correct $300 for starters. Beyond that, I wouldn’t be surprised if it eventually dropped two-thirds of its current price.


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