Seriously. I don’t get it. People are telling me “buy bonds, the market will explode” but when I went onto my brokerage I couldn’t understand a damn thing about what I was looking at. If anyone understands bonds, feel free to tell me what I should be doing.
Note: this post was made almost entirely in jest, I understand how bonds work but was miffed at how poor the front-end for buying them was at my brokerage. I’ll have a better post on bonds up later.
Yesterday I wrote about how the YOLO memesters might be creating market inefficiencies, today I thought I’d look at the other side of the coin with the more mature, more upscale passive ETFs.
For those who don’t know, a passive ETF is just a pile of money that you can buy into like a stock. When you hold a stock of $VTI for example, you own a tiny percentage of that big pile of money. The money in turn isn’t just a bunch of cash, it’s invested into the stock market according to the ETF’s prospectus, from which the ETF is not allowed to deviate from by law. $VTI’s prospectus says for example that it will seek to track the performance of the whole US stock market by investing in a representative sample of companies in that market. In this way, $VTI isn’t making a decision on the worth or value of any individual stock, it is merely buying every stock and assuming the market will do the hard work. Since the value of the total US stock market grows at an average rate of between 5% and 10% every year (with some down years like 2022), this means that $VTI is expected to grow at that pace as well and an investor in $VTI can make 5% to 10% returns without any of the stress or hassle of picking their own stocks. The only things $VTI asks for in return is a tiny amount of money in the form of it’s expense ratio, just 3¢ for every 100$ of investor’s money is taken for expenses, which seems to be a reasonable deal for everyone involved.
$VTI and other ETFs like it are easy, low-risk investment vehicles, so it’s no wonder they have exploded in popularity. Not only that, but studies have demonstrated that passively managed ETFs almost always outperform their actively managed peers. But is this “$VTI and chill” mindset of investors creating market inefficiencies of its own? Remember that passive ETFs invest in the whole market, regardless of if an underlying stock is any good or not. Not all ETFs are as broad as $VTI of course, some seek to track a certain market segment or a certain type of stock, but all passive ETFs share a commitment to obeying their prospectus and investing in valid companies without precondition. This means that they cannot participate in price discovery which is seen by some as the primary purpose of markets, including stock markets. If company A is growing, profitable, and well run, then it should be rewarded with having a higher value than it’s competitor, company B which is shrinking, unprofitable, and poorly run. We would expect that the stock market would perform price discovery on these two companies, investors would buy stock in the A and sell the stock in company B, raising and lowering their stock prices in turn. This then rewards company A for its success, and lets it use its high stock price as a tool to further expand the company, hopefully rewarding investors in the process and creating a virtuous cycle of success breeding success.
But passive ETFs don’t participate in price discovery, they don’t sell bad companies and buy good ones. Passive ETFs buy a representative sample of companies according to their prospectus, and they keep their expense ratios as low as possible in part by not doing the kind of deep dive on their investments that you would expect from an active investor. If company A and B are both worth 5% of the total stock in a passive ETF’s market, then it will hold 5% of its total value in both A and B. And if every investor in the market was a passive ETF, then there would be no way for the price of A and B to move relative to each other, because there would be no sell pressure on one relative to the other. Indeed some have claimed that the rise of passive ETFs is making the market less efficient, and tipping the scales towards large companies that will get bought up by the most popular ETFs simply because they are large and thus make up such a large portion of the market. If this is the case, then the erudite bogleheads are doing as much damage as the memesters.
Stocks have long been the investment vehicle of choice for people with small amounts of excess cash. Bonds are confusing, bank interest doesn’t pay much, and property requires high amounts of cash that most people don’t have. But stocks are easy to understand, potentially give jackpots, and require such a small amount of upfront investment that almost anyone can afford them. In ages past stocks were still usually bought through a specialized broker, and while the shoe shine boys in New York giving out stock tips may have been seen as a signal of a price crash, most people not living in major cities didn’t have access to a broker who could help them buy. The brokers were therefore a barrier to entry that prohibited a lot of people from owning stocks who otherwise might have. These days buying a stock can be as easy as installing the app, so quite literally anyone can own one at the push of a button. This has democratized the market, but may have led to some unexpected consequences.
It seems that these days, stocks have become more than an investment opportunity. Some stocks can be a badge of honor, a feeling of belonging, or a source of self-actualization. You may invest in nuclear power because you want to help fight climate change, you may invest in Manchester United because you love the club, you may invest in GameStop because you believe you’re destroying the short sellers and want to be part of something greater. None of these feelings have anything to do with the stock’s financial value. They aren’t a dividend, they aren’t growth, they are a feeling you have when you own the stock and those feelings are often irrational. In some ways these feelings call into question our understanding of stocks and investors generally.
Now let’s be clear, there has always been emotions in the stock market. Some people have always bought a company simply because they “liked” it with no better reason why, and “panics” can be just that: mindless rushes to cash out based on fear without thought. But when a stock’s price is almost entirely based on feeling rather than actual value, to some extend it forces us to re-evaluate the market as a whole. Last year, GameStop’s stock rose exponentially for no good reason whatsoever, and while some have considered it nothing more than a bubble, the price remains irrationally elevated even today. There is no way a stock with no growth, no earnings, and no path to profit should be trading so high, and yet it is. If you took a company that was identical to GameStop in every way, but called it something different, it would have but a small fraction of GameStop’s market cap. That’s because GameStop isn’t just a company, GameStop truly is a meme. It seems insane, but there truly is a group of people for whom ownership of GME stock is bringing them no financial value whatsoever, but who continue to hold it out of emotional value. You wouldn’t think such a group would be big enough to move the market, but last year showed them to be plenty large, and I believe there are still enough of them hanging around, holding the stock, and even buying more to ensure continued upward pressure on the stock’s price.
If a market is anything, it is a mechanism of price discovery. The stock market should be a mechanism to discover the correct price of companies, and our research assumes that this in turn allows profitable and growing companies to prosper while unprofitable and shrinking companies fail. We know market actors can be irrational, but the average of all market actors, the “wisdom of the crowds” so to speak should have some logical underpinning if the market is to find the correct price of these companies. Stocks becoming a form of self-expression more than an investment vehicle could introduce inefficiencies to this market, and I’ll still trying to come to grips with what the consequences could be. We might imagine a future in which board members will seek out a CEO based not on the value they can add to the company but by whether or not they, like Ryan Cohen, have a ready-made base of support among the memesters. But I don’t have the economic or statistical background to understand how much this would change things, maybe CEO’s have always been picked for dumb reasons. What do you think?
There’s a funny story about Ric Flair: Flair was at the height of his career making millions of dollars every year, but he knew that the good times would someday end and that he had to invest his money for retirement. He decided that he would invest in a business he knew well, and what could be a better business than a gym. Wrestling is a body business, and during his world travels as a wrestler Flair had been to all sorts of gyms to keep his physique in top shape for his matches. He knew what he liked and knew what a gym needed, so he put his money into building a high-end luxury gym in the Bahamas, then he starting dropping the name of his new gym in his promos so his legions of fans would want to buy memberships there. It was all coming together, but tragedy struck when in its very first year of operation a hurricane hit the Bahamas and wiped out Flair’s gym. Flair was distraught, but his friend tried to comfort him saying “surely you haven’t lost everything, didn’t you have insurance?” Flair shot back “what do I look like, an idiot! Why would I ever pay for insurance!”
It’s a story I like because it speaks to the mindset of many professionals, most of whom can be experts in their own field but just don’t understand how finances work. It’s easy to throw your hands up and see financial markets as a tool by evil rich people to take our money, but it’s important to know that everything in finances is just a bet or a hedge usually made in good faith. When you insure your property, you’re reducing your downside risk by ensuring you get a payout if the property gets destroyed, but in turn you reduce your upside return because you’re forced to pay for the insurance for as long as you hold the policy. The insurance company meanwhile is increasing their downside risk because they have to pay you money if your property gets destroyed, but in turn they increase their upside return by forcing you to pay them money for the policy. The insurance policy can also be seen as a kind of bet: the person paying for insurance is betting that the value of the payout will be more than the amount they pay towards the policy, aka a hurricane is more likely to hit the property. The issuer of the insurance is betting the opposite, that the payout will be less than the amount paid towards insurance. It’s funny to realize, but buying hurricane insurance is sort of like a placing bet that your property will get hit by a hurricane.
But what if the insurance company wants to reduce its own risk? There are various tools and instruments an insurance company can use to hedge its risk, in the same way a gym owner can use insurance to hedge the risk to a gym, and they all work in much the same way: one party bets than an action will happen, one party bets that it won’t, and the money goes to whoever is correct. A whole bunch of insurance policies can be securitized into catastrophe bonds for example. Let’s say Ric Flair builds a second gym and this time he insures it, in that case the insurance company can sell catastrophe bonds based on his policy. Now let’s say I buy 100$ worth of catastrophe bonds based on Flair’s insurance policy: the bond has a lifetime of 3 years, so if after 3 years no hurricane has destroyed Flair’s gym then I am entitled to my 100$ back plus some extra money known as the “coupon.” If on the other hand a hurricane does destroy Flair’s gym, then I lose my 100$ investment because the insurance company takes it to pay back Ric Flair. By buying this catastrophe bond, I am participating in a bet in which I think a hurricane won’t destroy Flair’s gym, and I make money if my bet is correct.
Now remember that a catastrophe bond is a security, it’s like any other bond that I can sell on the open market. If I need money, I can sell my bond to someone else for a fair value, but the amount I can sell it for will change as it gains or loses value based on outside forces. Say for example that scientists publish a report saying that the upcoming hurricane season will be the most destructive in history, suddenly it looks more likely that Ric Flair’s gym will get destroyed, meaning my bond won’t pay back the money, meaning the price of my bond will go down because people think it’s a less good investment. The opposite could occur too, if the Bahamas institute some national policy which mitigates hurricane risks for all residents, then it becomes less likely that Flair’s gym will be destroyed and thus more likely that my bond will pay back the money, so the price of my bond will go up. And because the price of bonds can go up or down, you can go short or long on them essentially betting on their price movement which is in part determined by the underlying risk.
Now let’s add another twist: hurricanes aren’t the only thing you can insure against, what about terrorism?
Let’s paint a scenario in which Ric Flair insures his gym against terrorism instead of hurricanes. The insurance company securitizes his policy into a bond which someone buys, I then take a short position against that bond. My short position means I’m betting the price of the bond will go down, and why would it go down? It could go down in part because people think terrorism is more likely to happen and destroy Flair’s gym, and in the aftermath of large terrorism attacks many catastrophe bonds’ prices do go down as the markets become fearful of follow-up or copycat attacks. By shorting a catastrophe bond on Ric Flair’s terrorism insurance, I make money whenever terrorism happens.
This exact situation has been seen by some as a monstrous moral hazard because since I get paid when terrorism happens I have a financial incentive to support policies that make terrorism more likely. What those policies are I won’t speculate, but some have painted grim pictures in which hedge funds could secretly move money to support terrorists in order to scare the market and make bank on their investments. In the aftermath of the Financial Crash this even led some to propose banning securitized insurance altogether, because not only was it speculative and dangerous just like the credit-default-swaps that were blamed for the crisis, but it also came with an in-built hazard in that people were incentivized to ensure terrible events happened. I feel like this is a misunderstanding of financial markets: these markets tend towards completeness. What that means is that every angle of a financial transaction tends to have space for someone to make a bet, because if there’s no monetary incentive for the price to move in every possible way then there’s less of a mechanism for price discovery. If you can securitize a loan then you can securitize an insurance policy, and if you can short a stock you can short a bond, these are just ways for companies to hedge their risk and for the market to discover the correct price of something. And note that the person shorting a catastrophe bond isn’t the only one with a financial incentive for terrorism: Ric Flair himself would have a financial incentive since he gets an insurance payout if his gym gets destroyed by terrorism. We’ve had laws to investigate and prevent this kind of thing for hundreds of years with arson and other forms of insurance and if we think people are breaking those laws then we should investigate and prosecute them, not ban an entire financial market.
This topic is probably well known to people with an understanding of economics, but that isn’t most people so I decided I wanted to write about it. With most of the Western world experiencing sky-high inflation these days, people are wondering when prices will ever come down. A reduction in prices would be an example of deflation, and the Fed has for years been working tirelessly against that, which might make some people wonder “why wouldn’t it be a good thing if prices went down?”
To begin with, technology is supposed to be deflationary and in this case it’s seen as a good thing as it allows the economy to grow faster and people to afford more things. However while deflation is expected in certain sectors, the economy as a whole should not be deflationary as it can pervert the market forces which lead to growth. In a deflationary environment, money gains value as time goes on and this means the rich get richer just by holding money, they don’t even have to invest it. Not only that but loans are very expensive because the value of money keeps going up. Both of these facts discourage investment and encourage sitting on wealth instead, which decreases economic growth and productivity.
This is often cited as to why despite its use throughout human history, a gold standard is not appropriate for a modern economy. A gold standard would ensure that money can only be created through mining more gold, and since the economy is expected to continue growing as more people join the workforce and more technology is rolled out, this would by necessity induce deflation. Deflation would then discourage investment and encourage hording, hindering economic growth and ossifying social mobility as old money becomes unassailable by new money.
For all these reasons most central banks have an inflation target of around 2%, let’s all hope they manage to get inflation in line.
Currently most of the western world is experiencing inflation of between 8% and 15% a year (although there are some stark outliers). The question on everyone’s mind is “will this become persistent,” my question is “how will we know if it has?”
The Federal Reserve’s view that inflation would be “transitory” didn’t seem so unreasonable when they made it in early 2021. Inflation was caused in part by the sudden drop in supply due to the COVID19 pandemic. That drop in supply had also caused a drop in demand, but as the economy opened up demand was rising and it was assumed supply would as well. This could have meant that within a year or two supply and demand would restablize to somewhere around their 2019 levels, when the factories and supply chains were fully staffed and the consumers were fully consuming. But something went wrong, at some point it seems that demand got well ahead of supply and at that point supply couldn’t catch up as long as low rates and easy money remained a policy of the Fed. And so in 2022 the Fed quietly retired the “transitory” label and started raising rates in earnest.
To digress a little, Argentina experienced an inflation rate of around 300% on average from 1975 to 1990, and the results on consumer habits were amazing. People generally spent all their money as soon as they had it, no saving in sight, because inflation erodes the value of saved money almost immediately. People would buy cars as soon as they hit the market, drive the car for a few years, and then sell it used and were able to make a profit because with 300% inflation the price of their car had gone up tremendously even as they drove it. The lack of any sort of savings, and the sky-high demand as people spent every peso they had, both became entrenched in the buying habits of Argentine consumers and those habits were difficult for the central bank to overcome. Worse still, these habits created a “tragedy of the commons” among the Argentine consumers, if everyone would be willing to spend less pesos and save more, then demand could cool off and supply could increase to match it, taming the inflation. But if only some of the consumers stopped spending and started saving, then inflation would persist at sky high levels and all those consumers would accomplish is the swift erosion of whatever money they put towards savings. If you wanted to keep your wealth during hyperinflation, you had to spend it (or convert it to dollars, which also didn’t help the peso).
The persistence of Argentine inflation was what made it so impossible to cool, not just the constant sticker shock. That’s part of why the Federal Reserve has been so deliberate and communicative, it wants to maintain the trust of the American consumers and producers. As long as people trust that the central bank will cool inflation, they will continue to save and not just spend spend spend. But if people don’t trust the institutions (as they did not in Argentina), then any attempts to maintain trust in the currency are futile. I haven’t detected the sort of tell-tale signs that inflation is becoming ingrained in American’s buying habits, we’d know if it had when people start buying things today on the assumption the price will rise in the near future, and I haven’t seen a lot of that. On the other hand I’m a scientist who doesn’t have much money for big purchases, so what do I know about spending habits?
Elon Musk and Cathie Wood are complaining about deflation again. For the most part they’re just sad that the Fed’s actions have cut off the flow of cheap money, reducing the price of stocks and thus reducing their total wealth. But they both have a tiny kernel of truth within their whining, technology is deflationary by nature and our monetary policy should be prepared to deal with it. But what does that even mean for technology to be deflationary?
I’d like to go back to a post I did on dividends for an example here. Let’s look at the Oil Shock of the 70s for a good example of an inflationary period. The rise in the price of oil led to inflation as companies and people who still needed it bid up the price in order to compete for what little oil was left to go around. This in turn pushed inflation into other sectors, as the lack of oil meant there was a lack of goods that relied on oil, thus the price of those was bid up as well. If we take the example of a company which uses oil to make certain goods, how do they deal with the oil shock?
Most directly, they can continue to buy oil at a high price and raise the price of their goods to compensate. As long as every other company in their sector is also forced to raise prices, the company will survive by pushing inflation onto their customers, but if the other companies making their good are not affected by the price of oil, then this strategy won’t work as the company will just bleed market share into bankruptcy.
Alternatively, they can look to find ways to reduce the amount of oil they use per unit product. In this way they can try to keep their prices low while their competitors’ prices are forced to rise, thereby gaining market share.
In a very real way, reducing the amount of oil used to create products would require some sort of innovation in technology, the creation of things like electric cars and nuclear power plants so that less of some stuff (oil) is being demanded and more goods are being supplied. This decrease in demand and increase in supply will cause deflation as prices drop due to these factors. Remember that this is why some neoliberals pushed back against price controls and rationing during the oil crisis, those things depress the market forces which would otherwise cause people to invest in innovation and trigger deflation.
So today we don’t have an oil crisis, but in Europe we have a gas crisis, and European countries have also declared their intentions to accelerate the gas crisis by subsidizing demand instead of reigning in supply. The problem here is that the government will pay the cost of this gas inflation and so there’s no reason for market-actors like companies to change their behavior or invest in alternative technologies. Perhaps the governments themselves will try to force investment in alternative technologies, but I’m skeptical they’ll do as well as the market would.
So what does all this mean? Well if you believe that we’re on the cusp of a technological revolution, then it’s true that the Fed could accidentally flip us into deflation without even trying. On the other hand one of the biggest drivers of inflation this year, energy, is being subsidized by the government with price caps or tax reductions so companies and individuals aren’t being forced to invest in new technology in order to limit their use. Technology is supposed to be deflationary, but that’s no guarantee.
Tuttle Capital made waves last week by bringing out an ETF called SJIM that would let you short the stock picks of TV personality Jim Cramer. Cramer, the longtime host of “Mad Money” on CNBC, has a prolific history of making bad calls from “Bear Sterns is Fine” to “sell Netflix in 2012” and even “Buy Netflix in 2022.” So it’s entirely unsurprising that “just do the opposite of Cramer” would gain traction as a valid investment strategy. What’s interesting is that this strategy runs counter to the semi-strong version of the Efficient Market Hypothesis (EMF) in a way that some might not expect. I’ve at times seen people attack Cramer based on the EMF, pointing out that even the best stock pickers rarely perform better than random chance and that therefore Cramer is by definition a waste of time. Yet many of those same people wouldn’t realize that if Cramer himself is a waste of time, then shorting him is a waste of money.
It comes down to what I sometimes call “the paradox of stock picking”: if you believe it’s impossible to predict the winners in the market, you must also agree it’s impossible to predict the losers. Many people agree that you can’t know with certainty which company in the stock market will do well in the future, past performance is no guarantee of future success and all that. What is the best electric vehicle company to invest in today? Tesla is synonymous with EVs, but then Microsoft was synonymous with tech in 2001, and if you put all your money into Microsoft in 2001 you would have missed out on the massive gains made by Apple, Google, and others. It’s hard to be certain that Telsa will continue to be the EV leader or even that it’s current growth trajectory is sustainable, and in either of those cases there could be some other company that would make a much better EV investment. So then let’s flip this question on it’s head: what is the worst EV company to invest in? Rivian is trading at around 600 times revenue for example (revenue 55 million, market cap 33 billion), can you guarantee that it is a bad investment? What about Nikola? They faked an electric truck by rolling one down a hill, are beset by scandal, and are still trading at about 80 times revenue, are they a bad investment? The EMF states that you cannot beat the market with fundamental analysis, so the investment opportunity of scandal-plagued Nikola and profit-less Rivian are already priced in by the market just as the growth opportunities of Tesla are already priced in. If you thought you could with 100% certainty pick which EV company was the worst investment, or even just a below average investment, then you could make an EFT made up of every EV company except the definitely-bad one. Then your EFT would beat the EV market as a whole because it would include all the market winners while eliminating one of the market losers. This would run directly counter to the EMF which says you cannot beat the market.
So getting back to Cramer, is shorting him via an ETF a waste of money? If you believe the semi-strong or strong versions of the EMF then Cramer’s chance of success as a stock picker is perfectly random, no more no less. In order for shorting him to be a good investment, then you must believe:
It’s important to note here that shorting Jim Cramer puts you on the hook for his successful calls as well as his failures. Failed predictions often generate more buzz than successes since the schadenfreude of seeing some idiot on the TV be proven wrong is a powerful emotional tool for getting people talking. But if SJIM had come about 15 years ago and you had held it, then you shorted Jim Cramer on his “Bear Sterns is Fine” call but also shorted him on “Buy Apple” in 2010. Adjusting for stock splits Apple’s price has gone from around 5$ to around 150$ in that time period, is that the kind of short position you want to take? Only time will tell if SJIM is a good investment I guess.
With the stock market down almost 25% year-to-date, it’s always necessary to remind people that the stock market is not the economy. The market can go way up in a “bad” economy (as we saw during the COVID lockdowns) and likewise can go way down in a “good” economy. But if the market is not the economy, then what is it?
Well in some ways that is a question with multiple answers. As stated in a previous post, for companies the stock market is a source of money, what professionals call “liquidity.” The ability to get more money when you need it just by selling stock, or to purchase assets with stock or borrow against stock, these are all ways that a company can treat stock like it is money and use it to grow their business. So when the stock market is down companies could have a harder time raising the money they need in order to grow and expand their business. In this way it can be argued that the stock market does affect the wider economy significantly by determining how easy it is for companies to grow and expand their business off the money from stock investors. If this source of money/liquidity is hard to come by (because of a bust stock market) then growth will suffer.
From an outside perspective however, the stock market can be seen as the expected near future of all the companies in the market. In a different post I explained that one mechanism that gives a stock value is the expectation of all future dividends (accounting for inflation and uncertainty). Dividends require profits in order to be sustainable, so if in the near future one expects most companies to turn unprofitable, then one would expect many companies to be forced to cut their dividend, and thus one would value stocks less and other investments (like bonds) more. Thus many people have argued that the stock market is a leading indicator for the economy as a whole, if the market is down then that probably says something about the near future of the companies in the market ie that they would be expected to be entering rough straights. In the same way the stock market can be the first thing to rebound out of a recession as investors look to the near future and expect profits and dividends to make a comeback.
So no, the stock market is not the economy. But this the stock market may tell us about the future of the economy, either directly causing that future (companies grow more slowly because it’s harder to raise money) or being an effect of that future (economic storm clouds cause the stock market to tank before the real economy). Either way, we should be prepared for whatever future it holds for us.
The stock market has been moving lately. Up, down, side-to-side, every movement can launch a thousand stories, but lately I’ve seen a lot of stories pop up of how someone should invest in this market and where they should put their money. I’m not going to say I have the answers to this question, or even the knowledge of how to find the answers, but I’ll lay out the facts of where I think you will not find the answers.
As an overview, the market is down somewhere between 20% and 25% since January. If you think the market is going to keep going down, you’d be advised to sell your stocks and hold them as cash until the market reaches a bottom and starts going back up. If you think we’ve reached the bottom you’d be advised to buy more stocks and rake in the profits as the market goes back up. There’s arguments for both, but some arguments that feel unsatisfactory are those based on technical analysis. I don’t mean to be unkind, I know many people swear by TA, perhaps even some of my readers, but TA reminds me of something else I know too much about: exegesis.
Exegesis of the bible or any other holy book is supposed to mean explaining the passages so that your target audience will better understand and act upon them. The problem is you can make exegesis say whatever you want, because ultimately your explanation is entirely up to you. When Jesus said “a rich man cannot enter the Kingdom of Heaven anymore than a camel can pass through the eye of a needle” what did he mean? An exegete can claim that this is a metaphor, that the eye of a needle is a metaphor for a very narrow gate which a camel overloaded with goods would not be able to pass through, so a rich man needs to give away some of his wealth to charity and then he can enter the Kingdom. Another exegete would say that this isn’t a metaphor, it’s a plain statement emphasized with sarcasm. A camel cannot pass through the eye of a needle, that’s just dumb, and so Jesus is saying a rich man cannot enter the Kingdom no matter how much he gives to charity. We can’t know exactly what Jesus meant by this because we can’t call Him up and ask Him. And there are hundreds of passages in the bible that an exegete can claim to mean whatever they want them to mean, as long as you define enough things as being metaphors or sarcasm or straight facts in order to defend your argument. Exegesis is a way of creating whatever meaning you want out of Scripture.
Technical Analysis seems to do the same thing with stock market trendlines. The line is going down, are we “testing support” and will soon break through to go even lower? Or are we “finding support” and will bounce off to go higher? You can draw the future trendline however you want, and I’ve honestly never heard of a cogent argument proving that some form of TA is true more often than any other form, or is true more often than a random coin flip. I’ve seen both bulls and bears quote their TA studies to support their points, and yet I’ve never seen the kind of scientific analysis that can prove the methods to be useful. The counterargument is that many people, some of them very wealthy and successful stock traders, use TA to build their portfolios and so TA must be useful otherwise those people wouldn’t keep doing it. My response would be that TA is no more accurate than random chance, and since the market is not zero-sum and rises on average ~7% per year, many people can become supremely wealthy based on this random chance while believing they are beating the market. I don’t know, it all just seems like wishful thinking, and I’d love to be directed towards some studies discussing the efficacy of TA as a strategy.
Streams of Consciousness 