Remember all those bullish studies market pundits were passing around in early January? Do you recall the parroting about “how goes January, the rest of the year follows?” It’s easy to forget, but many market strategists were falling all over themselves bullish just a couple of weeks ago (see Parabolic Moves Don’t End by Going Sideways).
Now, some 300 handles lower in the S&P 500, many of these same forecasters are talking about the extensive technical damage and advocating caution.
I am not here to pick on any pundits – I subscribe to the Yogi Berra school of forecasting – it’s tough to make predictions, especially about the future. But I take issue with one major aspect of the current investing environment. Most market players are using the playbook from the last few decades in their forecasts. They are mistakenly thinking the rules of the game haven’t changed.
Their predictions from last month are still ringing in my ears; low volatility January rises have been followed with stock market strength, so there’s no way anyone could predict that stocks would swoon 10% in a week and a half for no real reason at all. Yet that’s exactly what they did.
What’s different today?
I find myself hesitant to type out these next few lines. As I struggle to find the words to communicate my thoughts, I worry they will be misconstrued. Yet I don’t know how else to say it – except to blurt it out. So at the risk of being labeled a fool, here it goes – it’s different this time.
Yup. I said it. I committed the cardinal sin of investing. I uttered the most expensive four words in the history of markets.
Before you call me a Luddite and hit delete on your email or click the home button on your browser, hear me out.
I am all too aware that Jesse Livermore was spot on correct when he said, “I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
In the big picture, the game never changes. There will be early shrewd veterans who get in early. There will be overly eager fools who stay in too late. The players won’t change. The end result will always be the same.
Yet, the circumstances surrounding the game are always different. In 1987 it was portfolio insurance. The turn of the century saw the DotCom bubble. Then in 2008, the credit crisis surprised everyone with the most violent risk asset sell-off in a hundred years.
There are plenty of market strategists who believe they know the cause of the next crisis. Although I have my own theories, I am not nearly as confident as most of these other pundits.
And neither am I suggesting that you blindly close your eyes and continue to be long financial assets because the rise seems unstoppable. No, far from it. I am petrified about how our financial system has been distorted with quantitative easing and negative rates.
But I suggest that anyone who claims to know how this financial science experiment ends is kidding themselves.
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