When the stock market correction started last year we heard every catastrophic scenario from the prophets of disaster: a 20% drop, a 30% plunge, a 50% bear market and even worse. Now, as usual, these prophets keep quiet.
In my opinion, there are two types that make long-term calls about the market:
The market does not care whether someone is inexperienced or psychotic and who thinks that a prediction of the magnitude of a correction is possible, whether that is done using trendlines, Fibonacci ratios, moving averages or by other quant or even esoteric methods. The problem is that some of these individuals never admit their mistakes but instead find all sorts of excuses, such as, for example, that the prediction was not confirmed or that they changed their mind. However, they must not ignore that fact that this is the age of Big Data and that everything is recorded in databases.
The S&P 500 was off 14.1% from its 52-week high on February 11 and since it has gained 16%. The index closed yesterday 1.4% off its all-time high and the year-to-date return is 2.8%, as shown on the chart above. The prophets of disaster were proven wrong once more but as soon as another short-term correction starts, some of them that resist learning their lesson will come back, often with their arrogant attitude.
The issue is not whether these disaster forecast will turn out to be right. It is rather that they are only confirmed in hindsight and when issued ex-ante only reflect the inexperience and/or the state of psychosis of those that make them.
Those of us who take the market one day at the time are often accused of being too “short-term.” But those that make such claims again ignore that longer-term moves are made up of many shorter-term moves.
Charting and backtesting program: Amibroker
Detailed technical and quantitative analysis of Dow-30 stocks and popular ETFs can be found in our Weekly Premium Report.