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It's fascinating to me what passes for financial reporting these days. This morning I came across a little jewel by Mark Ackerman who once again blames the big bad Market Bogeyman for the fact that equities have not crashed and burned this fall. I guess it's that time of the year again - and no I'm not talking about Halloween. After all October is high SKEW month and how dare equities NOT fall off the plate six years and counting! Be this as it may - we are used to seeing our daily dose of doomsday reports and most of it we simply fade out for the useless and unproductive noise it is.
However articles like this follow a cognitive dissonance that we all fall prey to during our life and unfortunately it is not reduced to only the trading domain, it affects all aspects of our life. We will be dissecting this beast like a frog, so let me grab my B.S. scalpel and start cutting away, layer by layer:
In recent days, the stock market has been like an economic roller coaster, rising one day before falling -- dramatically -- the next.
Isn't that what markets do? They rise and they fall, they do not move in a straight line or we'd all be billionaires. There is no recipe as to the magnitude of the market's gyrations. However there are seasonal forces that affect SKEW. If you are not familiar with the term - here's a definition I lifted right off Investopedia:"Skewness is extremely important to finance and investing. Most sets of data, including stock prices and asset returns, have either positive or negative skew rather than following the balanced normal distribution (which has a skewness of zero). By knowing which way data is skewed, one can better estimate whether a given (or future) data point will be more or less than the mean.
Most advanced economic analysis models study data for skewness and incorporate this into their calculations. Skewness risk is the risk that a model assumes a normal distribution of data when in fact data is skewed to the left or right of the mean."So to say that 'in recent days' the market has been like an economic roller coaster discards the fact that this, to a certain degree, happens every single day/week/month/year. There are periods in which SKEW is historically more amplified and guess which month has the highest SKEW of them all.
Yes, you guessed it - October. I have written about this before and it's a fact that most of the crashes in history occurred in the fall season. Let's list the 10 largest crashes by magnitude:
Turns out on average October is somewhere in the middle, and that includes all the crashes. So it's really a matter of interpretation. In the last 64 years give or take we've had four stock market crashes in October - three in 2008 and one in 1997. That still leaves you with 62 years in which you would have done quite well in equities. That does not mean it's wise to ignore the potential for outliers in October (like I warned about earlier this month when we were dropping) but neither should you jump to conclusions.When saying 'the market these days' has done x - implicitly suggests that it's an extraordinary situation/event and that is simply not true.
When writing financial newsletters the wording is extremely important as it's easy to assume a biased tone/approach. Personally I try to be as objective as humanly possible and quite frankly it's a daily struggle as I, just like you, am not immune to outside stimuli. We can however do our best by limiting our exposure and by questioning every little piece of information based on its merit.
And on those down days, the market often seems as though it has slipped into a free-fall, dropping hundreds of points in just a few hours.
I'll come right out with it - yes, there probably is a Plunge Protection Team. Is it responsible for lifting the market ahead of potential crashes? I do not know - maybe - there are definitely indications of such attempts. But although I love a good conspiracy theory as much as the next guy I am not willing to base my trading activity or my investments on hunches or hyperbole. If you have ever spent more than a few months trading then you have probably realized that sell offs move much faster than rising markets. It's an implicit product of human psychology - sell offs are driven by fear and often panic, which accelerates and spreads. All the proof you need is any daily, weekly, or monthly chart. Compare the sell off candles with the buy candles and this intrinsic aspect of market behavior will become clear to you.
Copied from Evilspeculator.com - the rest of this article can be found here.
However articles like this follow a cognitive dissonance that we all fall prey to during our life and unfortunately it is not reduced to only the trading domain, it affects all aspects of our life. We will be dissecting this beast like a frog, so let me grab my B.S. scalpel and start cutting away, layer by layer:
In recent days, the stock market has been like an economic roller coaster, rising one day before falling -- dramatically -- the next.
Isn't that what markets do? They rise and they fall, they do not move in a straight line or we'd all be billionaires. There is no recipe as to the magnitude of the market's gyrations. However there are seasonal forces that affect SKEW. If you are not familiar with the term - here's a definition I lifted right off Investopedia:"Skewness is extremely important to finance and investing. Most sets of data, including stock prices and asset returns, have either positive or negative skew rather than following the balanced normal distribution (which has a skewness of zero). By knowing which way data is skewed, one can better estimate whether a given (or future) data point will be more or less than the mean.
Most advanced economic analysis models study data for skewness and incorporate this into their calculations. Skewness risk is the risk that a model assumes a normal distribution of data when in fact data is skewed to the left or right of the mean."So to say that 'in recent days' the market has been like an economic roller coaster discards the fact that this, to a certain degree, happens every single day/week/month/year. There are periods in which SKEW is historically more amplified and guess which month has the highest SKEW of them all.
Yes, you guessed it - October. I have written about this before and it's a fact that most of the crashes in history occurred in the fall season. Let's list the 10 largest crashes by magnitude:
- October 15th 2008: -7.87%
- December 1st 2008: -7.7%
- October 9th 2008 - 7.33%
- October 27th 1997: -7.18%
- September 17th 2001: -7.13%
- September 29th 2008: -6.98%
- October 22nd 2008: -5.69%
- April 14th 2000: -5.66%
- August 8th 2011: - 5.55%
- August 10th 2011: -4.62%
Turns out on average October is somewhere in the middle, and that includes all the crashes. So it's really a matter of interpretation. In the last 64 years give or take we've had four stock market crashes in October - three in 2008 and one in 1997. That still leaves you with 62 years in which you would have done quite well in equities. That does not mean it's wise to ignore the potential for outliers in October (like I warned about earlier this month when we were dropping) but neither should you jump to conclusions.When saying 'the market these days' has done x - implicitly suggests that it's an extraordinary situation/event and that is simply not true.
When writing financial newsletters the wording is extremely important as it's easy to assume a biased tone/approach. Personally I try to be as objective as humanly possible and quite frankly it's a daily struggle as I, just like you, am not immune to outside stimuli. We can however do our best by limiting our exposure and by questioning every little piece of information based on its merit.
And on those down days, the market often seems as though it has slipped into a free-fall, dropping hundreds of points in just a few hours.
I'll come right out with it - yes, there probably is a Plunge Protection Team. Is it responsible for lifting the market ahead of potential crashes? I do not know - maybe - there are definitely indications of such attempts. But although I love a good conspiracy theory as much as the next guy I am not willing to base my trading activity or my investments on hunches or hyperbole. If you have ever spent more than a few months trading then you have probably realized that sell offs move much faster than rising markets. It's an implicit product of human psychology - sell offs are driven by fear and often panic, which accelerates and spreads. All the proof you need is any daily, weekly, or monthly chart. Compare the sell off candles with the buy candles and this intrinsic aspect of market behavior will become clear to you.
Copied from Evilspeculator.com - the rest of this article can be found here.