Predictions Are Tough

From Barrons today:

In a world weighed down by debt and low nominal GDP growth, with deflationary pressures mounting, it’s a no-brainer that risk assets aren’t likely to fare well. Dee points out that “we are sailing into these choppy waters without a life preserver; fiscal and monetary levers have already been pulled.” That means that come another financial crisis, “the only policy response left will be to print money.” Which, of course, is what the gold bugs are counting on and why bullion has glistened so brightly. He sums it all up this way: What we’ve had since May is a nice bounce by an oversold market. “The rally, however,” he cautions, “has been ragged. I think it’s very timely to sell those tired longs and short anything in the way of the coming storm.”

I happen to share those beliefs, but my current bets are not fundamentally driven. Who knows when markets will trend (and in what direction exactly). We can just be ready.

19 thoughts on “Predictions Are Tough

  1. I agree as well – but as you point out Michael, it’s impossible to predict exactly when or how these predictions might come to pass. We could easily have another significant rally before we see a big downturn, which is why it’s so important to be ready for anything!

  2. The problem with macro fundamental approaches is that a million things can happen on your way to being right because there are a thousand variables involved.

    For example, many of us believe that the US dollar is toast because of an untenable US debt situation. But compared to what? When things start to fall apart around the world, there’s only one currency that can take all comers and provide security against other currencies: the US dollar. So anyone that simply assumed the US debt situation was going to sink its currency took a bath if they blindly went with their simplistic assumption this year.

    We trendfollowers, however, made out like bandits playing the USD!!

    Cheers

  3. The value of fundamental analysis for good traders is not in it’s predictions. The value is in how the market(price action) assimilates the fundamental information. Fundamental analysis functions as a kind of shock absorber. It does not allow you to be shaken and shocked. It is a kind of armor around the trader. For such traders fundamental analysis provides context for each particular trade. Statistical approaches that employ historical data lose the context in which each particular trade or investment occurs. Those traders that look to the fundamentals, as long as the particular context holds true, may be able to ride out big positions. Now, I know quite a few traders that trade this way and show great results but for the most part such an approach is mostly art than science.

  4. Jim,

    It took me a while to understand your comment…I agree completely.

    My comment is akin to the market staying irrational longer than one can remain solvent. Just because something shouldn’t be happening in the market doesn’t mean it isn’t happening. I constantly get a chuckle out of CNBC, et al when they say the market isn’t reflecting the fundamentals. I always ask, “Which fundamentals?”

    Cheers

  5. @Jim Rohrbach

    The value is not so much in fundamental analysis per se but the “expectation” of market players who assess fundamental conditions to make buy and sell decisions! Ed Seykota put it best when he stated ” …. if you catch on early, before others believe, you might have valuable surprise-a-mentals.” I fully agree with that statement. One of the most important questions a trader or investor can ask is “what is discounted?”

  6. Trender says: “One of the most important questions a trader or investor can ask is “what is discounted?”

    Again, this is not a trend following attribute. If you “trend trade” using this as a “rule” then you are going to miss moves that are made from highs. Believe it or not, even in the current environment there are opportunities that aren’t at (or been near) historic lows. If you’re using this type of rule then you are a value trader, not a trend trader.

  7. @Trader Jim, no I’m not using that type of rule. And no “discount theory” has nothing to do with value investing. I basically strictly follow the tenets of trend following. I am not a religious mechanical trend follower as most who visit this site are. Not all trend following traders are 100% computerized mechanical traders. Some apply it as an art form! To name a few: Bruce Kovner, George Soros, Michael Marcus and many, many others but these are perhaps the more famous ones. There are still many more traders who fall in this category that choose not to wear TF label. For those who don’t have a good feel for the markets(which is most people), a strict back-tested mechanical approach is their best bet. I got into a similar discussion before @ #27 here: http://www.michaelcovel.com/2010/06/11/the-real-hand-that-rocks-the-cradle/#comment-11103

  8. I’m going to say something that’s sacrilegious on this site. When you apply TF as an art form it simply means that some breakouts are better than others. I say this with the caveat that the best chance for most people is a back-tested mechanical approach.

  9. Trender-

    Simply assigning the term “discounted” to a market or vehicle is a prediction of future price… it’s as simple as that.

    If you can’t understand that then there’s no use discussing this with you any further, much like there’s been no use in the past. I only bring up the point because it’s yet another time you choose to twist the definition of trend following to fit your own beliefs.

    You can try and talk your way out of this by calling what you (and others) do an “art form”, and maybe it is, but it’s certainly not trend following. Most of the traders you name don’t call themselves trend followers because they aren’t.

    Almost every trader uses some type of trend identification to justify their trades, that doesn’t mean that they are trend followers… there’s a huge difference.

  10. Trender says: “For those who don’t have a good feel for the markets(which is most people), a strict back-tested mechanical approach is their best bet.”

    LOL. You’re even more full of yourself then I realized.

    I’ve been trading for a decade now… I have an excellent “feel” for the markets I trade and have AVERAGED a 115% return per year. I’m just not stupid enough to believe I can predict the future so I don’t have to add a bunch of ridiculous nonsense to my trading plan to make me feel like a trading “artist”.

  11. Trader Jim says: “Simply assigning the term “discounted” to a market or vehicle is a prediction of future price… it’s as simple as that.”

    I find your post amusing. Who said anything about prediction? You’re the one that keeps harping on about it. Obviously you do not understand what is actually meant by “discount”. Maybe this quote from Ed Seykota may help clarify your confusion:

    “People do not discount time. They discount an idea as it gathers credibility in the moment of now.” -Ed

    Congratulations on your many years of success.

  12. Trender… you are the one who used the reference to looking for discounted opportunities in the markets. I stand by my previous post… anyone who uses that logic is predicting future price and is NOT a trend follower.

    You can’t rewrite history when it’s just a few posts above in black and white (the last line of post #7). No true trend follower would ever ask themselves that question.

  13. Dan K-

    Nothing, if that’s how you want to trade… but one of the cardinal rules of trend following is that there are no predictions of future price.

  14. Trader Jim… Here are my opinions: 1. You don’t seem to understand how a discounting mechanism works and yet like to argue about it. 2. you have a narrow view of trend following.

    Humans by nature are very slow to face facts, to respond to and face reality(for all I know you may be an exception). Often times there is a difference between what people expect and what actually happens. Such a nature often displays trends in all facets of life, including price behavior. If you see the psychological structures that generate such trends then you can see what’s discounted and what’s not, what’s obvious and what’s unexpected. In the long run, what people expect by definition rarely happens(meaning no trend). I feel a broad understanding of the psychology involved makes TF all that much interesting.

  15. Trender-

    Here are my views about your comment(s):

    1. You said to me “no one is talking about predictions but you”. Perhaps you should read the article (or even the title of the article). You don’t seem to understand that this article is about predictions, not any type of “discounting”, “psychology” or anything else.

    2. Your use of Seykota’s quote is out of context and off-topic (as well as the rest of your comments). If you feel a need to “name drop” quotes into your comments then you should pick ones that have something to do with the subject matter at hand.

    3. My view and understanding of trend following isn’t “narrow”, it’s by definition. You, on the other hand, seem to have a need to change a well defined method of trading to fit your own ego and beliefs while trying to demonstrate your knowledge of it. Once you start making your “artistic” changes referenced in your comments your method is no longer pure trend following… it’s your own amalgam… a bastardized version. This is evidenced by your comments about some breakouts being “better” than others. No one knows this until the situation is history, so your “trading art” is either using selective methods to filter breakouts which is not trend following, or you’re only looking at history on a chart and not really trading them at all.

    4. I hope that you’re better at your “trading art” (whatever it is) then you are at comprehension or communication.

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