Analysis Can Kill Your Returns: Understand Noise From True Analysis

Markets continue to be very volatile, simply meaning big up days and bigger down days. Risks have not subsided at all, but we continue to see how markets act.  The Toronto Stock Exchange is a ‘Sell’ based on our market timing tool, and you can add to the list the Chinese Shanghai.  The US, Europe, and Japan are still in ‘Buy’ territory but not performing well and providing risk signals.  Investors listen to the so-called experts and act accordingly, but so often they are wrong. Daily data or macro issues do not impact markets direction.  Until investors understand how markets and economies work, they will always underperform indexes and many times lose money…..

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What never ceases to amaze me is how investors react to the so-called experts.  I used to be one of them, as I thought that these experts are in the news and make gobs of money, so they must know what they are doing and be right. But as an advisor, many top advisors and myself ended up convinced that a ‘buy’ rating meant sell and vice versa.  Many analysts and strategists timing stunk, and it continues today.  Yes, some analysts are excellent and ‘GET IT,’ but most follow data and expect the markets to react accordingly.

Remember when we are at the bottom of the economy in the spring of 2009?  Probably many have forgotten, not due to age, but our mind wants to move towards positive things and this period was not close to that. The media and most expert analysts were professing that things looked awful. The financial system was at risk of falling apart and the world entering a Great Depression. Well, think of the average investor and what they probably did.  One of two things:

  1. Put their head in the sand and pretended everything was fine – by this point of the cycle they would have been the lucky ones
  2. Or, sold much of their stock and equity investments, as fear told them they could lose a great deal more than they already had on paper.

Hindsight is great, but prudent investors should have been buying at that time, as that was one of the best buying signals we have had in decades. Our signal got us back into stocks on June 2, 2009, less than three months post the bottom of the market. I will guarantee you that sentiment was near bottom at that point and most investors wanted to sell, with many doing so, not buying.

Let’s look at a few recent examples of ludicrous expert analysis’. I read from many investment pros that the stock market dropped due to rising rates. Then when the market rallied, I read from the same experts in some cases, that the markets were moving up due to higher interest rates….CRAZY.

I have also been seeing on CNBC and reading that Consumer Price Index (CPI) is suggesting inflations, so the market would continue to crash.  Yet CPI was higher than expected but the market held strong the day it was reported and actually rallied.  The markets are not this simple. They are complex entities that are driven by overall sentiment and waves both up and down.

When US and world markets started to sell off last week, most expert pundits stated it was due to Trump’s trade talk on tariffs on steel and aluminum. But if you look back, the markets started selling off two days before this announcement. I guess stock markets are clairvoyant.  And just look at last Friday where the world’s top tweeter, Trump, sent out one that said that a trade war would be good for the US. Experts expected the markets to sell off hard. So, what happened on Friday?  It bottomed in the morning and rallied the rest of the day. So, what did I hear that afternoon from the experts, was that the reason the market was rallying was due to Trump’s tweet – totally conflicting from morning to night.

Remember, any piece of data can be molded to sell a story.  It can argue why markets run up or why markets sell off or why they do nothing. The analysis is simply there to confuse the masses and make the experts appear like geniuses, but someone should track the success of their thoughts…..I would pretty much guarantee that it is lower than 50% and probably a great deal lower. All they are doing is presenting convoluted logic to market participants who get confused and count on their advisors and professional managers to take care of them.

The point here is simple:  attempting to determine a correlation between the news of the day and stock performance is a guaranteed losing battle.  Do this, and you will be on the wrong side of the market a great deal of time. If you are a trader, you will be without your capital relatively quickly, although you will argue that your logic in trades was flawless and based on real data.  Things do not work that way.

The other important point to consider is that all these market experts are predicting what happens after the release of data or information.  And the reality is, they are wrong more than right. So, what about forecasts based on what the market will do before it occurs?  Few are ever accurate, as they generally base future on past movements and market data.

The S&P 500 appears to be heading towards the 2400 region and possibly the 2500 region before it pauses to determine its next move.  We have stated that there is a possibility that the market can run over 3000 before the next major crash OR we are in the midst of it now, which is backed by the Canadian Stock Exchange and Shanghai Indexes.

We will advise you when the US, Japan, and Europe provide a sell signal like these other two markets. We are either at the end or very close to the end of a major wave up from March 2009, with the potential for massive downside to follow.

Here is a chart from Elliott Wave International who believe we are now at the beginning of a massive wave down that will go for a few years and take us down potentially over 80%:

Based on their wave (sentiment analysis), this is not the proven path yet, as the market will have to break through some major resistance levels first. Here is a second Elliott Wave analysis that is less likely but could occur and it is more bullish prior to the crash occurring:

This is once again our secondary option and key support levels will tell us if the market did just complete Primary Wave 3 or 5 (final wave).  In this possibility, the market will rally to one final high later this year than have a 20 to 25% correction prior to rallying to new all-time highs, probably in late 2020.

Again, markets are probabilities, and risk managing different periods. At this point of the cycle, the risks are very high, with a crash a strong possibility, so you should not be acting in a normal investor behavior. Build cash and have protective measures like stop-losses on stocks; more quality bond positions; and possibly hedges like puts.

Matt Sammut
Founder, Fortrus Financial Inc.