July 24, 2011


There is very little we can do to affect the broad markets since most of what does influence emanates from emotion. But just in case we loose sight of the very reason we invest in the first place we should remember that the essence of long term discipline is that short term effect is more distraction than substance. That distraction however is especially potent these days as more and more investors are compelled to do it themselves, egged on by the thrill of young studs harnessing technology for answers to the questions that have eluded us for centuries, namely when to get into the market and when to get out. Allow me my own perspective…TIMING DOESN'T WORK.

Whew, that was harder than it sounded. As you know I am not adverse to the benefits of sound analysis of the indexes including methods that rely on technical analysis. But technical analysis is only a means by which a set of ranges are established by a methodology arrived at statistically from a consistent base sequence independently correlated to index prices. Arriving at a set of levels, for example, where to buy and where not to buy (as opposed to sell) is the easy part. The hard part is accepting that since price action is mostly determined by emotion the outcome of a set of price points will invariably be skewed. Luckily though there are many events that do repeat themselves as when the markets move in reaction to a set of common events, such as the external forces of politics, or the commonly accepted thresholds of certain closely watched economic indicators. While no single event will ever tell me that the stochastic that crosses K through D (look it up) at 20% wont be a more rewarding buy until it goes to 10% an experienced trader will have numerous opportunities to witness the behavior of a buy signal under similar conditions. Therefore while all this information can be plugged into an excel spreadsheet and managed to a set of predetermined translations of events, back tested through randomization (I know because I've done it) it still will fall short of human interpretation. And since those price points I mentioned earlier are skewed so would their interpretation.

I don’t mean to be confusing, it’s simply a fact that even the best technical analysis will be wrong, hopefully only 49% of the time. The problem is that fact is never part of the pitch that claims to hold the keys to the kingdom. While the results are often wrong, the claims are never in doubt.