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3.24.2018 - Free Investing Newsletter Bookmark

Can You Hear Me Now?
 
If you want to look really really stupid, just go ahead and make predictions about the future. Except for a handful of very rare people, the Cosmic universe seems to get a chuckle out of making fools out people who attempt to predict the future.
 
If you want proof of that, just consider what Mother nature does to your typical weatherman just about every week. These guys are pretty happy if they get a 55% correct ratio. That’s not much above 50/50. Coin flips tend to average that.

 
There are however, ways that you can improve your odds at suggesting something may or may not occur. Suppose for example that you have two weeks of vacation coming in April. Suppose also that you’ve bought airline tickets to travel from the US to the Virgin Islands. Let’s also suppose you’ve booked a hotel for 7 nights. At that point, it is a high probability “guess” to say that shortly in the future, you are going to be traveling to a Caribbean island.
 
You could feel confident telling people about what is going to happen to you in the future. Your success rate on that particular prediction is probably going to be 98% or better. Sure the unexpected “fat tail” event could show up. A strange off season hurricane could brew, or your boss revokes your vacation, or God forbid, you get hit by a bus tomorrow. But all in all, it’s a pretty safe prediction.
 
On the other hand, there’s areas where your predictions are no better than rank and file guesses. You might get it right, you might not. In those instances, you do your best to try and tilt the odds in your favor. Consider sports betting. You can consult the experts and even the computers. You can match up the health of the players on team 1, against those of team 2. You can ratio the players speeds, catches, yards gained on the ground, physical size, and a hundred other data points.
 
Yet history shows, that more times than not, it doesn’t work. I’m not a fan of basketball by any means, and frankly, I’ve never sat through an entire game. But millions take it to heart and live by it. So, each year they do their March madness “brackets” trying to figure out which teams will win, and ultimately predict the overall winner.
 
This isn’t a couple old guys smoking cigars in a back room. This is MILLIONS of people, some with every “stat” known to man. This is Vegas, and computer algorithms. This is the best of the best in sports betting. With that kind of fire power, one would imagine that they’ve done really well, right? Well, no. It seems that “predicting” things isn’t quite that easy.
 
A quick look at some past performance results showed the following:

2014: 18,471 out of approximately 11 million were a perfect 16-for-16 on the first Thursday (.2 percent)

2015: 273 out of 11.57 million were a perfect 16-for-16 on the first Thursday (.002 percent)
 
So, how are things going this year? This from ESPN:

After the first 16 games of the Round of 64 concluded on Thursday, just 6,306 brackets remained perfect in the ESPN Men’s Tournament Challenge game. That’s 0.036% of the 17.3 million total brackets entered.
 
Did you catch the math? Out of 17.3 MILLION brackets entered, just 6,303 were still good in the first round of 16 games. .036%.   That means that out of every two million eight hundred thousand “guesses” only ONE was right.
 
Predicting success is often predicated on the amount of inputs one needs to integrate into the process. The more data that has to be input, the less the chances of the prediction coming true, because the amount of variables quickly leaps into astronomical amounts. For instance, what if you input a million variables into your computer, attempting to find the winner of a basketball game. You’ve compared everything from speed of players, to heights, to jumping ability to free throw percentages and on and on and on.
 
But the one variable you didn’t know of, was that team A, had newly designed sneakers, just released. They are a new compound that lets the players stop and pivot more quickly as they have more grip than anything ever made before. So, while your high end computer suggested that Team B would win, Team A actually wins by 2 points, simply because their players had that tiny advantage of a new shoe design. Little things mean a lot.
 
Well consider all that in the context of trying to figure out what markets might do in the future. We’re not talking thousands of data points, or millions. We’re talking trillions of them. The low hanging fruit is fairly easy to spot. Interest rates rising for instance is usually not that great for bulls. But what about such esoteric items such as credit swaps? What weight does their health bear on the markets?

Toss in the decisions of Central bankers. Toss in currency ratio’s. Toss in oil markets. Toss in pension fund decisions. Toss in political turmoil. Toss in tariffs. Toss in wages. Toss in manipulations. Toss in demographics, toss in...ad infinitum.
 
It never ends. There is simply too much data that can at any time, influence the minute by minute direction of markets. The best we, or anyone else can do, is take educated guesses based on history, human nature, important economic data, charts, and try to come up with the most logical “next move”. It isn’t easy, and prone to failure.
 
We have never had a negative year. In 22 years of doing this publicly, we’ve managed to put out winning numbers. Granted some years were considerably better than others, but we’ve never had a losing year. If you take a year where the DOW and the S&P ended down 5% and we ended + 2.5% for the year, hey, it’s a win. Then there’s been times when the DOW and S&P well outperformed us. That doesn’t bother us at all. Our goal is to always be positive at the end of the year, and avoid the big pull downs. We’re always trying to “beat” the indexes, but if we don’t, I don’t lose any sleep over it. I just don’t want to lose.
 
Well I caught a lot of flack back in January for lightening up our positions. Let me explain: If you read the sales literature of the so called guru’s out there, they seem to be able to manage 15, 20, 30 open positions at any one time. I personally have not been able to do that. It gets overwhelming. My sweet spot is between 4 and 7 open positions at any one time.
 
Well in the beginning of the year, WHILE the market was going straight up crazy, I was reducing the amount of open positions. Often I’d have just 3. Or 2. People were writing in, saying that we should be more aggressive and that I’m missing it.
 
So, why was I so cautious during the insane run up of January? Let me share something that I wrote back on 12/6/17 in this very letter. The market was displaying some odd moves, and it felt heavy. This is what I wrote:
 
So while the market feels tired and we appear to be running out of steam, saying that this is “over” is very hard. My guess was that sometime between December and February that yes, the market rally would finally run out of gas. Could it be now? Yeah it could. But it’s hard to believe it.
 
Notice that one line? . My guess was that sometime between December and February that yes, the market rally would finally run out of gas.
 
 
I was having a really hard time believing that the December “weakness” was truly the end, because I suspected we’d get a “January effect” bounce to start the year. But the reason that I was not aggressive in the January run up, was simply because I felt that when the January bounce had run its course, we very will might see the market run off the rails. So we kept position size small, and kept open positions low in number.
 
Well February hit like a sledge hammer. We are down 3,000 DOW points since the January highs. We had fallen 10%, bounced, and as of Friday, were down over 10% again. Call it luck if you’d like, but we didn’t lose anything. We had sold “into” the run up, selling half positions and cashing out on dips, instead of buying more.
 
What we’re “in” right now, is exactly what I thought was going to hit between December and February. It hit in February, and here we are over a month later and we’re still “in it”. What ever it is.
 
I don’t know the future folks. There’s a hundred, a thousand, a million, a trillion plates in the air. I don’t know if the Central banks are going to rush in and use the plunge protection team to buy up billions in futures and halt this slide, or if it’s going to continue for months. What I do know is that this plunge has been well overdue and we’re in it.
 
So, let’s make some observations. I said over and over and over, in fact I even put a picture of the DOW chart in the letter, showing the sideways cone the DOW had been in. I said it would either resolve to the upside, or the downside ( Pretty obvious right?) but that I had a hundred reasons for the market to fall, but only one for it to run even higher. That was intervention by the Central banks. If they came in, we’d bust higher and run for new highs. If they stayed away, we’d fall. Well, we fell out of the cone.
 
Is it over? Well, on the first day we faded outside that lower boundary support, I told my members that it wasn’t a good sign, but it could have been a “one day wonder” and that one outside day, doesn’t a new trend make. It tried to get back “into” that sideways triangle two more times, and failed. Then, it fell like a rock for two days.
 
Today we’re just about 200 DOW points from its 200 day moving average. That’s at 23357. We closed at 23533. That should be the next support level. Will we get there? I “think” so. Why? Yes, the last two days have been brutal. 700+ points down Thursday, 400+ more on Friday. Yet what was lacking? Volume.
 
For a washout to end, what we really WANT to see is a huge volume day. A capitulation day where everyone and his brother throws in the towel. We haven’t had that. Sure it’s possible they halt this and try and work us higher, but without that last big volume rush for the doors, it’s hard to believe the downside isn’t over yet.
 
We’re now short term oversold. Only 15% of the S&P is still over its 50 day moving averages. So a bounce is in order. Watching how far that bounce takes us before it rolls over again will be key in deciding if the correction is over, or we’re headed even lower.
 
Finally, I titled this “Can you hear me now?” NOT to suggest I made some wonderful prediction that’s apparently come true. No. I called it that, because so many people had been lulled into thinking that the market could only go up, that they were ignoring my warnings, almost mocking me for being cautious. Consider it a wake up call folks. Markets can go down, and they go down fast. Do you hear me now?   Good luck out there.

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