What is superstition? We define it as man’s way of dealing with the unknown! There are many things in this world that just cannot be explained. However, it appears not to be part of our make up to accept that certain things are “unknowable”. After all we humans were given a brain with which to think and rationalize…..so it is in our inherent make-up that there must be an explanation for everything.
The future by definition is unknowable yet investors continue to hold opinions on what the future holds, that is, make predictions. Consider this quote from John W. Henry:
Investors hope or believe that they can predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that’s where our profits come from. I believe it is that simple!
For those of you who don’t know John W. Henry he is the owner of the Boston Red Sox and trading company John W Henry & Company. Perhaps we can relate Henry’s philosophy to Donald Rumsfeld’s famous “known unknowns” quote:
Yes at the time everyone laughed at Rumsfeld, but if you listen carefully there is a very serious message in this for anyone attempting to navigate financial markets!
Anyway let’s get straight to the point; what do we know? The future cannot be predicted but crowd behaviour generally moves in trends (this is why we get trends in financial markets). If we go with the known (follow the trend) and stay away from rationalizing (explaining the present or predicting the future) we will dramatically improve our success in trading.
Our analysis of the charts below may appear to be rather simple but that is for a reason. We define a bull trend as a positive performance over a rolling 100 day period. Yes while there may well be some weakness creeping into equity, commodity and real estate markets over the last few days, all three “asset classes” have considerable room to move before the 100 day rate of change turns negative (signalling a bear trend). We don’t know how long these trends will last for all we can do is trade with the trend.
People are getting edgy about the fall in equities. However, in reality the broad Value Line has only had three negative days so far and even these were nothing out of the ordinary. The Value Line probably has room to fall to the 1900 level before the bull trend is questioned.
A new high in investment grade bonds, not exactly the typical behaviour you would expect if the market was genuinely bearish.
Going nowhere in a hurry is perhaps how one could best describe commodity markets. However, they do still remain positive on a rolling 100 day basis so we have to give them the bullish benefit of the doubt.
The big dollar index could rally to the 78 level and still not have breached any significant downtrend levels. The 100 day rate of change is clearly negative; we will go with this and wear the volatility.
Even if IYR fell to the 36 level it would still remain in a bull trend. We think consolidation now would be rather healthy.
So there we have it, nothing to suggest an impending change to the risk seeking trade that has beset markets ever since mid March. We see weakness in equities and commodities as a buying opportunity. Now where is that rabbit’s tail!
