Originally posted March 12, 2013 (changed web hosts and back ups only through 2/28 were transferred)
One day last week I found myself tapping the TV mute button so as to concentrate on the afternoon’s essay. Plus, CNBC was featuring its daily technical analysts debate, which I view as an utter waste of airtime. This is where two geniuses argue over whether the market, or a given stock or sector, is going from here based on some combination of chart lines tracking any number of factors. On any given day I can tell, with the sound off even, who’s bullish and who’s bearish. Being that we’ve been living in the midst of rising stock prices, these days the bears are typically flush in the face and dramatically more expressive than their opponents. The bulls of course will sport the widest of grins.
This morning’s commentary from the floor of the New York Stock Exchange was all about the S&P 500 breaking above its, I think, 50-day (or maybe it was its 200-day) moving average. And the last time it did such, in such fashion—supposedly a few weeks ago—that index, according to the gentleman on the floor, stalled for a few days then catapulted to a 5-year high. And, no kidding, he, and the strategist at the desk, were taking this phenomenon very very seriously.
How desperate we are to know the unknowable. So much so that vast amounts of time and money are forever spent hypothesizing, testing, articulating and manipulating the very few measurable factors, in a world of countless unmeasurable factors, that might motivate a buyer and a seller to agree on the price of a share of stock. So much so that some would have us believe that they can foretell what’s to come when the lines that draw today’s mountainous stock charts resemble the lines that charted the markets of old. For certainly those mirrored lines can’t be pure coincidence—they indeed must portend a near-term trend, right? Well, emphatically, wrong!
The simple fact that, daily, CNBC is able to pit two technical analysts against one another proves conclusively that the charts of old have virtually no predictive value. I.e., two individuals—who have spent untold sums on the schooling it takes to justify an appearance on the world’s #1 financial network—looking at the same charts, yet coming to different conclusions, means that the S&P 500 busting through some moving average signals nothing more than either an upward, downward or sideways near-term market trend. In other words, it signals zilch!
We can easily apply Hayek’s view of economics —“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”— to the market:
The market forever demonstrates to men how little they really know about what they imagine they can predict.
And of course it’s that unpredictability that allows the stock market to function. I.e., every doom-saying seller needs a bleary-eyed buyer…