I've been thinking about what kind of predictions to make this weekend and it's very tricky.
This chart, from Dr. Brett, illustrates why it's been so difficult to hold positions in the second half of '07. While overnight trading gave us a nice pump virtually every day, those gains were more than erased during the trading session. This is why, despite my best intentions to be bullish, we ended us making far more put-side day trades than calls in the last two quarters:
A conspiracy theorist might say this is very clear evidence of a prolonged attempt to use overnight trading to artificially prop up a decaying market but that's crazy talk. If someone were going to manipulate the markets just pounding the overnights will only fool the short-term chart watchers. In order to affect the weekly charts, you'd need to make some sort of effort at least one day a week to print a good high but there is no way you could coordinate the kind of effort that would be required to attack a single day is there?
Even if you could form a cabal of funds to plow their money into targeted stocks on a certain day – since they know it's a sham, they'd certainly want to get their money back out the next day – that would cause a very obvious pattern… LIKE THIS:
What a wasted year we had! All we had to do was go long at Tuesday's close and short into the highs on Wednesday's (oil inventory day) run ups and take the rest of the week off. Oh wait, that's pretty much what we did! I've mentioned it before but it's very interesting to see it quantified – how often do I end up calling a post "Turnaround Tuesday, Which Way Wednesday and Thursday Thump?" I had thought I was just being uncreative, but here it is in black and white – It is the same old thing over and over!
Another thing Dr. Brett put into black and white is Rule #1 – Always sell into the initial excitement:
The human brain is hardwired to look for patterns and, to a large extent, the tendency of investors to take action based on expectations of repeting patterns is a trait that is exploited by market manipulators. Technical traders are, of course, highly suceptable to being sucked into following false patterns but, as we did this year, once we identify the movements, we can adjust our trading style to follow the shorter-range movements.
As I often say to members: "I don't care if it's a scam as long as I know what the scam is."
There's a great book that discusses pattern recognition under the greater topic of complexity theory in economics called "The Origin of Wealth" (a nod to Darwin and Smith) which is a very interesting take on this subject.
