Predictions are fun. Not terribly useful, granted. But fun.
In every field of endeavor there are people who are considered “visionaries”, i.e., persons who are able to envision how certain futures trends and events will unfold and are able to articulate their “vision” in advance of said trends and/or events. A great example of this is the late Steven Jobs. Jobs (in case you just recently awakened from a coma, in which case, “welcome back”) was the driving force that led Apple to introduce a series of breakthrough (and wildly popular) products in the field of personal electronics. But to say that Steven Jobs was an exception to the rule would be a minor understatement.
Unfortunately, there is something about the financial markets (quite possibly the lure of easy money) that seems to inspire people to make what seems to be far more predictions than in most other fields. For every prediction Steven Jobs ever made about the future of personal electronics, there were approximately 6,256,375 random predictions made at about the same time regarding the stock market.
Equally unfortunately, for every 6,256,375 financial market predictions made, approximately 6,256,368 of them don’t pan out. In a nutshell, the “winning percentage” for financial market predictions is so low you essentially have to go underground to get an accurate reading. Ironically, this doesn’t seem to deter anyone from “trying again.” (In the immortal words of Glenn Frey, “the lure of easy money – it’s got a very strong appeal”). Indeed.
So what is an intrepid investor to do? Well, for starters, consider the following:
Jay’s Trading Maxim #37: Recognizing the trend right now is worth far more than a thousand predictions on what will happen next.
This is a more succinct version of the earlier version which stated:
Jay’s Trading Maxim #37: It’s really hard to predict what’s going to happen in the stock market over the next [insert your preferred time frame here]. And when I say “really hard” I mean “really, really hard”.
These particular maxims evolved from a recurring and disturbing pattern of events that basically went something like this:
1) One guy would predict that the market would go up over the next x-months. And in fact it actually would.
2) Suddenly everyone – myself included – couldn’t wait to hear what this “oracle” had to say next.
3) Maybe he would get another call right, but eventually he would get it almost exactly and completely wrong – either confidently advising everyone to “buy” just before a big market drop, or shouting “SELL” right before – you guessed it – the next big rally.
4) Then everyone would scurry off to follow another advisor who had correctly “predicted” the rally that the last guy had missed.
5) So on and so forth, repeat, ad nauseum, ad infinitum.
So what’s an investor/trader to do?
#1. Respect the trend
To truly appreciate “the power of the trend”, pause for a moment and reflect on all of the economic and political news that you have digested so far during 2013. Now consider the action of the stock market so far in 2013. Let me sum things up as succinctly as possible:
Stock Market: Good
This juxtaposition makes little sense to many people. “If the news is all bad and the economy is still not really picking up (and so on and so forth), it’s just a matter of time before the stock market figures this all out and tanks.”
And perhaps that will ultimately prove to be true.
But take one more look at the action of the stock market in 2013 and think about what an investor would have missed had he or she succumbed to fear.
In the end, ignoring the news and simply respecting the trend was the thing to do.
Same as it ever was.
#2. Recognize Historical Tendencies
OK, here’s where it starts to get tricky. First off, clearly all trend experience pullbacks along the way. At the present time a person would be hard pressed to say that the stock market is not in an uptrend. And based on everything I have said so far one might assume that I would simply say “play the long side” of the market and forget the blips.
But like I say, even the most obvious trends experience pullbacks. Also, if at the outset of any calendar year you asked the question, “when is the stock market most likely to experience trouble”, the answer of “September and/or October” would have been correct a high percentage of the time.
So here we sit in late September. Most of the major averages have broken out to new highs and the Fed just announced QE2IB (“Quantative Easing to Infinity and Beyond”). So alot of the people who have been focusing in the bad news all year are reaching a point of “bear exhaustion.” In other words they are saying “OK, OK, the trend is bullish, I get it.” Given this confluence of factors no one should be surprised to see the stock market pullback in the weeks ahead.
Still, out of respect to the primary trend I prefer to “hedge” rather than to pound the table and shout “sell everything”! (Although for the record there is something cathartic about actually pounding on the table and shouting “sell everything!” Go ahead, try it once, you’ll see what I’m talking about). I still like the idea of holding VXX calls as I wrote about here (http://jayonthemarkets.com/2013/09/17/looking-to-vxx-just-in-case/. If the stock markets does have a sell off in its near futures, the VIX Index will almost certainly “spike” to higher ground, and VXX call options have the potential to soar. As I write the November 14 VXX call is trading at $1.42. Not a bad hedge for $142.