Down goes the Dow

Ghost of Igloi wrote:

“Trends unfold when the world changes. Prices adjust as we recognize that the future is likely to look different from the past. Underlying change is often driven by natural cycles. They include cycles in weather, debt, leverage, capital investment, innovation, politics, population, international relations. In late stage, they are sometimes amplified by mass hysteria. Systematic trend-following strategies just finished their worst decade of performance in 120yrs. So did long volatility strategies. It was a decade of homogeneity, policy predictability. It’s over.“

Eric Peters, One River Asset Management

It's not over until the Fed says it's over. And lately they've been saying anything but.

I think more people have been listening to the Fed than to Eric Peters.

Have you seen the futures prices?

Ghost of Igloi wrote:

We get these stories every week, and eventually learn it is mostly hype. But notice the power of these leaked stories get reduced over time.

https://www.cnbc.com/2020/05/25/stock-market-futures-open-to-close-news.html

You seriously have to stop listening to CNBC.

I thought this was funny, coming from Igy:

Ghost of Igloi wrote:We get these stories every week, and eventually learn it is mostly hype. ...

Igy, you share links to your favourite bearish analysts daily, and have done for a few years now. So far, entirely hype. Just over 7 months left in the year, will your predictions finally come true?

And in a related question, do you feel that the probability of sub-1500 by end-December TODAY is higher than it was the last time I asked you that question a couple of weeks ago? I'm happy to give a short lecture on temporal probability to correct your understanding if your answer is yes... :-)

fisky wrote:I'd really like to see the SP500 close above 3000 this week.

With about 7 hours to the opening bell, futures are pointing in that direction. which means little or nothing... Mind you, European markets were up yesterday, and Asian markets are having a good day today, so maybe it's more likely than not.

the idiot wrote:

I thought this was funny, coming from Igy:

Ghost of Igloi wrote:We get these stories every week, and eventually learn it is mostly hype. ...

Igy, you share links to your favourite bearish analysts daily, and have done for a few years now. So far, entirely hype. Just over 7 months left in the year, will your predictions finally come true?

And in a related question, do you feel that the probability of sub-1500 by end-December TODAY is higher than it was the last time I asked you that question a couple of weeks ago? I'm happy to give a short lecture on temporal probability to correct your understanding if your answer is yes... :-)

the idiot,

Good time to review a few points, so thank you for the post. What were your statistical models predicting on February 19th when the S&P 500 closed at 3,386.15? I believe as the trend reached the recent low of 2,180 you mentioned that I may be owed an apology by some posters. Certainly one could argue that without $Trillions in QE and fiscal stimulus 1,500 was in the cards, actually pretty easily. One should be ashamed to take a victory lap when the cost to achieve it is so high. This is a market given EPO and steroids (Hydroxychloquine) to survive another day.

The pandemic is likely the greatest social, political, and economic event in our lifetime, exposing many of the fallacies of this era. Fed Monetary policy has extended the business cycle at cost of boom-bust periods of increasing severity, resulting in lower GDP growth. And really, if you look at market, has hurt investor returns (use pensions, 20 year S&P 500, or bond yields as your proxy) . To assume that this Bear Market Rally alters the inevitability of where we land is naive in my view. The Bullish view counts on a V-shaped recovery, yet ignores the rising debt and multiple expansion to achieve it.

Looking at Q1 S&P 500 2020 GAAP EPS of $12.51 with 95% of companies reporting should be a concern. The last time we had a quarter this low was Q2 2009 when EPS was $13.51 and the quarter closed at a price of 919.32 on the S&P 500. Wall Street is telling us to look forward to Q4 2020 when EPS is expected to recover to an average of $33.43 a share. The hope for a vaccine, Trump re-election, more stimulus, and re-hiring of tens of millions is forward looking, perhaps not very realistically. On the other hand 2020 GAAP EPS Estimate of $93.88 is too high, and was marked down a couple of dollars just recently. Even using this number, applyIng a historical average multiple of 16 get you to 1,502.08.

So, yes.

Igy

Ghost of Igloi wrote:(1) What were your statistical models predicting on February 19th when the S&P 500 closed at 3,386.15?

(2)I believe as the trend reached the recent low of 2,180 you mentioned that I may be owed an apology by some posters.

(1) If we rewind the tape to that point in time, we will see that I was moving to cash as I expected that a downward movement was far more likely than continued upward momentum. And I've never made "predictions" on here, rather "forecasts," with broad ranges. I've been criticized for this (by people who didn't counter with their own better, narrower "predictions," mind you...)

(2) I recall saying something to that effect. Worth emphasizing the word "may," though. Your worst fears didn't materialize, not by a long shot. Or perhaps, not YET...

And now, a lecture on probability.

First of all, probability is a philosophical concept more than a mathematical one, from the point of view that it is almost always subjective, resting in the eye of the beholder, more a measurement of belief (or uncertainty) than an objective measure of likelihood that all independent observers could agree on.

But let's pretend for the moment that probability can always be defined numerically in an objective way. If we look at SP500 data since 1950 to 2017 (the data set I have played with in the past), there has never been a drop of 49% (what it would take to drop from Friday's close to 1500) within a 210 day period (roughly the time we have left between now and end-December). It almost happened once, but only reached a maximum of -48%. that's the biggest drop inside a 210 day period within 17168 trading days. Therefore, the observed return period for a 49% drop in a random 210 day period (let's use the next 210 days as just that...) is longer than 17168 trading days (~ 67 years, +/-).

We could make some assumptions (or do some analysis) to better understand the variability of such events to come up with a probability of a 49% drop in THIS next 210 day period, but casually you can see that it is vanishingly low, effectively zero. Not precisely zero, mind you, but practically so.

Of course, we can consider other factors. If stocks are expensive, a drop is relatively more likely. If we fear an impending pandemic, maybe a drop is relatively more likely. But considering those additional factors is not straightforward, and not possible in an objective way.

As time grows shorter, the probability of a 49% drop decreases. The maximum drops observed, ever since 1950, within one month, three months and six months have been -32%, -42% and -46%. a 49% tumble (if that's still what's needed) becomes progressively less likely as the time over which we wait gets smaller.

I will only charge $0.02 CAD for that lousy advice...

the idiot,

OK, I understand the probability and your point. Thank you. What your model does not address is how the market is less stable today. Now one can argue that QE and fiscal stimulus increases the stability. True, as long as the behavior of investors does not drive the market cap to 140% of GDP while EPS is collapsing and unemployment is at historic levels.

Looks like we will open above 3,000 and 25,000 and the Bulls are in the driver’s seat for now.

Igy

I appreciate the differing opinions here. That said, here's my opinion.

This market is being driven by FOMO. Historical fundamental tools have been pushed aside for the duration. How long the "duration" will be is anyone's guess, but I'm short term bullish. Long term... well, I'll just stick with short term bullish because... FOMO.

A good example is over the long weekend, I looked at airline stocks and decided to buy DAL this morning. It's unlikely revenue will approach 2019 levels for at least a year, but the stock dropped from ~60 in Feb to Friday's close of 22.69. A move to, say, 40 would double my investment. Unfortunately, it's trading at 24.25 as I type this... not sure whether to buy or watch for a pullback. I guess I'll by a partial position and watch.

the idiot wrote:

And now, a lecture on probability.

First of all, probability is a philosophical concept more than a mathematical one, from the point of view that it is almost always subjective, resting in the eye of the beholder, more a measurement of belief (or uncertainty) than an objective measure of likelihood that all independent observers could agree on.

Don't quit your day job.

Racket wrote:Don't quit your day job.

Yeah, I get it racket, you're way smarter than me. I eagerly await your superior analysis.

BTW, this is what I do for my day job (think probabilistically and give advice as a result), don't tell my colleagues, clients and partners I'm so stupid, k?

Ghost of Igloi wrote:...What your model does not address is how the market is less stable today. Now one can argue that QE and fiscal stimulus increases the stability. True, as long as the behavior of investors does not drive the market cap to 140% of GDP while EPS is collapsing and unemployment is at historic levels. ...

All kinds of stuff we can't properly consider in trying to evaluate probabilities to support a forecast. The naive forecasts I've presented previously are just that; they've made sole use of past market behaviour without trying to understand forces that drove variability and then use such forces to modify the forecasts. However, as I've said before, I don't believe that incorporating MORE information helps any of us mere mortal retail investors (most of the time). Unless we happen to be privy to inside information.

fisky wrote:That said, here's my opinion.

This market is being driven by FOMO.

I guess I think the short term fluctuations are driven by FOMO, but the trend is a function of the balance between supply and demand, mainly, and true valuation somewhat, but to a much, much smaller degree. Hence I'm not so fussed to see the divergence between fundamentals and price that have evolved over recent years and decades (and that drive Igy and his tribe giddy with excitement for the shoe to drop...). I do think relatively bigger and / or more rapid change away from the trend are important indicators of approximate near-term forward-looking behaviour. Bubbles always pop in some fashion (this is really a universal law). But what defines a bubble is harder to get your arms around.

fisky wrote:

I appreciate the differing opinions here. That said, here's my opinion.

This market is being driven by FOMO. Historical fundamental tools have been pushed aside for the duration. How long the "duration" will be is anyone's guess, but I'm short term bullish. Long term... well, I'll just stick with short term bullish because... FOMO.

A good example is over the long weekend, I looked at airline stocks and decided to buy DAL this morning. It's unlikely revenue will approach 2019 levels for at least a year, but the stock dropped from ~60 in Feb to Friday's close of 22.69. A move to, say, 40 would double my investment. Unfortunately, it's trading at 24.25 as I type this... not sure whether to buy or watch for a pullback. I guess I'll by a partial position and watch.

It's also being driven by short covering.

the VIX was at 80 not too long ago. I can't quite express how amazing and extreme that is.

When the VIX is at 80 it's like a battleship heeling over to port massively, gunwales dipping into the water, almost capsized.

But it didn't capsize.

The battleship started righting itself, swinging over to starboard. But it didn't stop when the ship was upright. Markets dont' work like that. The ship kept going over to starboard, until those gunwales were also dipped in the water.

The next move will be the ship rocking back to port in an extreme manner, but not as extreme as the first two moves. And then moderating back to starboard.

The point is that a VIX at 80 put forces into play that are jamming the market up now. It's like a short squeeze. It will end, but no one knows when.

So it's not just FOMO.

and i'd add that there are many trillions of new dollars in the world that will be spent - that's a mighty tidal wave of spending, when it happens. Markets know that.

the idiot wrote:

Racket wrote:Don't quit your day job.

Yeah, I get it racket, you're way smarter than me. I eagerly await your superior analysis.

BTW, this is what I do for my day job (think probabilistically and give advice as a result), don't tell my colleagues, clients and partners I'm so stupid, k?

The fact you do it for a living means less than nothing to me. There's many people in the world who are very bad at what they do, but they continue to do it nonetheless.

My guess is that you're conflating statistics with probability. Probability was rigorously defined by Kolmogorov back in the 30s. Statistics is often accused of being a soft science.

Racket wrote:My guess is that ...

Don't guess, pony up with something better than I wrote. We will all benefit from your experience, expertise and wisdom, I'm sure.

I will add, I gave an invited talk a few years ago comparing and contrasting the opposite ends of the philosphical / thinking style spectrum in my particular profession, likening the two opposite poles to two pop culture characters (who I won't name, as google would make it to easy to out me). On the one end are deterministic thinkers who generally struggle with probabilistic concepts and when they do think probabilistically, can't get outside the frequence frame. At the other end are non-linear thinkers who operate more comfortably from the bayesian point of view, treating probabilities as degrees of belief. These people (my tribe) are suspicious of deterministic methods.

I'm guessing (maybe I'm wrong) you're on the opposite end of the spectrum from me. My experience is that people like that (in my field anyway) make up about 80-90% of the population, and can't even recognize the possibility that the other people exist, let alone have a valid way of thinking.

Probably I'm wrong and this is all rubbish...

the idiot wrote:

Racket wrote:My guess is that ...

Don't guess, pony up with something better than I wrote. We will all benefit from your experience, expertise and wisdom, I'm sure.

Clean up your mess? No thanks, already spent a few years doing that as a grad student.

Racket wrote:Clean up your mess? No thanks, already spent a few years doing that as a grad student.

OK then, more passive aggressive cheap shots and smarmy commentary.

Grow up racket. Some day your grad school will pay off too.

(yes, I've lowered myself to cheap shots. Your whiny sniping has finally gotten to me. I claim covid-brain in defence)

The old Bayesianism vs frequentism debate I see.

You know what, on second thought, I should have never gotten involved. You're right, enjoy your day.