In mid-July 2007, the Dow Jones index stock market made what appeared to be an important top.
Naturally, this gave rise among the usual TV pundits to pessimistic perceptions of the US economy, the long-term impact of the war in Iraq, and so on. However, what is fascinating and even mildly annoying is that just a week prior, when the Dow Jones broke to new all-time highs on July 12th, the analysis could not have been more euphoric. At least one economic commentator could see the Dow many thousands of points higher by year end.
So, where is this guy hiding now, especially in light of the US home loans crisis that came to the surface a very short time later?…
All of this demonstrates the fickle nature of those who try to forecast stock, currency, commodity and bond market movements using purely economic arguments alone. During my time on the floors of major investment banks, these characters were a constant irritation to me, not least because of the worship the entire industry unfailingly pays to them. It seems that in this world you get eternal credit for SOUNDING as if you know what you are talking about, regardless of whether or not you actually do!
However, the proof of the pudding is very simple: how accurate are they?…
The answer is, not very. In fact, I am reminded of an old adage from Elliott Wave theory which states that when everyone is madly bearish, the market is probably making final BOTTOM. When everyone and his brother are wildly bullish, so much so that even the restaurant waiter is checking his stock portfolio, you know you’re close to final TOP!
This unlikely advice is astonishingly accurate. In fact, I remember once buying a new home based partly on this perspective. So, this isn’t just a fancy theory. I’ve actually profited from it in real life.
The essential problem is that these economic pundits are providing reasons AFTER the fact for why the market has done what it has already done, and they always look good riding on a trend that they imagine is likely to carry into the future. However, what most uncritical people fail to realize is that there is no empirical PROOF for anything these jokers are saying. In other words, there is no evidence that the market moved BECAUSE of the specific factors that they discussed! Where’s the proof of that?
Answer: “There ain’t none!”
The stock market or forex market moved, and afterwards they said something about what they believe to be the causes. However, there is not necessarily any connection whatsoever between the market’s actual move and the causes they cite.
This is why the technical analysis approach is always superior and far more accurate than the best economist can ever be. It makes no pretentious claims about the ‘why’ of market movement, but simply tells you, from the point of view of probabilities, what the market is most LIKELY to do. Almost invariably, a good technical analyst can tell from the charts that the market is about to make a top or a bottom, and they will tell you so well in advance of the event. They will then observe to their chagrin and annoyance, as I have had to do on countless occasions, an ‘expert’ economist explain the ‘reasons why’ the market made said move.
And who sounds the most impressive and gets the most credit in this screwed up world of ours? The guy who actually told you the move in advance, and maybe even traded it, or the guy who comes on AFTER the move has happened and spouts a bunch of complex-sounding fancy words and theories?
I’ll give you a clue: it’s not the first guy!
Of course, said expert can never call the moves in advance, but they can always explain them with extreme eloquent after the event! They make their careers on the fact that the human mind has this ferocious need to know WHY, even if there IS no overall single why to be found.
This is the topic for another article, but in brief we can say here: the markets are far too complex and multi-variable, and at motion simultaneously in a whole range of different time-frames, to ever be reduced down to a few handy formulas such as inflation, budget deficit, interest rate expectations, home loan mortgage crisis, or whatever.
Certainly, the financial markets may use some of these factors as an excuse to do what they were going to do anyway (and it is the technical analyst, studying the charts, who is going to make the forecast in advance of the move, not in retrospect). However, to suggest that there is a simple cause/effect relationship between what the financial markets do and what economists imagine in their tiny minds are the reasons is frankly laughable, if it were not so dangerous.
Here is the danger, and it is one that the trader can all too easily fall into: the danger of believing in it!
In this modern age, we are deluged with information, and so it is critical that we pay attention only to information that is valuable. The latest ravings of your Johnny-come-lately TV economist are NOT accurate information as far as forecasting market movements is concerned, or even understanding past movements or current trends.
Again, the reason why is that there is no empirical proof that all this expert sounding blah-blah has any connection to reality whatsoever. The fact that it sounds good does not make it good, or even useful. What you need as a trader is a methodology that has proven itself over the test of time, not just another blast of hot air.
Hence, the trader should be very wary of what he/she lets into the mind and allows to influence trading decisions. You might find yourself over-riding your own impulses, or even your proven trading system, because of something some idiot said on TV! You then have plenty of time to regret it when your original impulse proves correct, but you are not in the move, thanks to some damn economist!
Listen to this and listen good: You’ve got to cut the BS out of your trading process!
So, if you are prone to listen to these clowns, take a good hard look at yourself and what you are doing. How often has this additional so-called information actually helped you profit in trading, and how often has it confused you or caused you to lose? Be very cold-blooded about asking yourself this. I think you will then see the brutal truth of what I am telling you!
In conclusion, don’t try to ‘understand’ the underlying causes of market moves because they are essentially beyond human comprehension. If you want an equally futile task, stand outside on a windy day and try to ‘explain’ the specific fundamental causes behind each gust of wind that strikes your face. Instead of trying to understand, or trying to use such arrogance as part of your trading method, instead work upon a method that forecasts stock, bond or forex market moves based upon sound principles that repeat with high probability.
You will almost certainly achieve the latter through a sound understanding of the technical factors associated with financial market price charts.
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