I Was Wrong

The financial markets are tough. They are hard to predict. When they prove someone wrong, they do it in the harshest way possible. My forecasting record so far is 0 for 3.

I put together a forecast based on seasonal patterns for which I could establish some statistical significance. However, the markets decided to head into the opposite direction. The Fed Model I frequently wrote about was hardly ever more bullish, yet the markets went down like a stone in deep water. The Dow Theory whose validity I questioned more than once, has in fact given a very timely sell signal this time around.

I could retreat from here and nurse my bruised ego, and then come back and try to rationalize away the 0 to 3 defeat. That would not do me or anybody else any good. So instead I ask the question: What can be learned from all of this?

A few things are obvious to me. For instance, statistical significance is not synonymous with inevitability. Forecasts are a double edged sword. It is great when you are right, but when you are wrong you look like a fool.

Even a model based a verified principles can produce the wrong results some of the time. And a random dart throw will inevitably be right some of the time.

In the meantime the financial markets are grinding along. It appears that the bullish trench line has been cut wide open. The bullish forces launch a massive counter-offensive yesterday. It was well prepared with a massive artillery bombardment (S&P futures 20+ points above fair value). Yet after a huge initial success, it quickly turned into a rout and ended with another loss of territory for the bullish forces.

At this point in time the conversation around the lunch table at work turns inevitably to the recent losses in the stock market. The gainfully employed are bemoaning the losses their portfolios sustained in the last few weeks. They invariably recount the joy they felt when the recognized that their mutual funds had doubled at some time in the past. They talk about their visions of a retirement in luxury on Barbados, which have now been shattered by the markets.

I listen in silence and take it all in. I am going to watch out for sightings of the Wall and Bay Street operators of yore. They will leave their comfortable mansions and visit their brokers when they sense blood in the street. Then they will purchase high quality shares for 20 cents on the dollar. And after their purchases are made, they will once again retire to their mansions until the next time...

This time around I am going to join them!