BNN hostess Frances Horodelski writes a piece for the BNN newsletter every day. I consider this daily update one of the more informed and witty financial commentaries one can read. Frances is an intuitive trader and market commentator. Also, she is one heck of a nice person. A while ago, Ms. Horodelski wrote a piece after returning from a 2-week vacation. She noted that a lot had changed over that short time away from her desk, including the massive losses on oil, a crash in the Russian Ruble, a markdown on the markets, etc. She went on to say that nobody predicted these markdowns before she left – at least to the extent that they fell while she was away.
This is the time of the year that we start to hear market guru’s – who are often pressured by the media to provide their opinions – give their two cents worth on the coming calendar year. As Frances noted – who at the beginning of 2014 predicted the decline of Russia, the crash in oil, the Ebola scare, and the bullish return of the long bond? I know I didn’t get any of those – with the exception of a mid-year cautionary stance on oil (I cautioned readers about oil in July and October of this year). Here are my blogs:
The point I would like to emphasise is that measuring or predicting market movements or events out beyond a few months becomes increasingly difficult. Technical analysts can make reasonably accurate predictions for time periods of less than 6 months, but not much further. We T.A.’s rely on crowd behavior studies, momentum and moneyflow to predict price behaviour. These indicators are really best used in the short term – which I will define as less than 6 months. The further out we go, the greater chance for unpredictable events to alter crowd behavior and change the trend on a security. Fundamental analysts and economists are no different in their inability to predict much beyond a few months. Witness the lack of predictions on the above events by prognosticators at this time last year. For this reason, I tend to place little faith in anyone’s predictions for 2015 – although I must admit that I am called by Bloomberg and Reuters for a year-forward prediction every year. I’m as guilty of adding to the media bombardment of predictions as anyone.
Having noted that it’s hard to predict beyond 6 months or so, I would like to note that certain technical patterns can be reasonably predictive for longer periods of time. But their reliability depends on current crowd behavior to continue for a longer time period – which becomes exponentially harder to predict as time marches forward. I have often noted long termed breakouts on this blog and through my media writings/appearances, such as my predictions on MSFT, AIG, TXN and AIG back in December of 2013. These stocks demonstrated mega-long breakout patterns – which at the time suggested multi-year upside potential. Here is my blog on those charts:
I noted a similar breakout on a stock during my BNN MarketCall show last Friday. Here’s the Globe & Mail write-up along with the video clip on that stock and my other top picks:
While these big breakouts can be reasonably accurate in predicting longer termed price movements, you must respect the fact that the further out you are trying to predict, the greater likelihood of interference by unforeseeable factors!
Thus, from an investors prospective, we should keep a close eye on trend lines, support and resistance points and fundamental factors on our big-picture breakout stocks.
I’m going to leave you now with 10 rules – provided by Merrill Lynch’s former head of research and Technical Analyst Bob Farrell. I noted one of his rules (number 8) on my last blog when I referred to oil’s current pattern. Enjoy these words of wisdom, and I wish you and your family all the best over the holidays and in 2015!
I’ll be back next Monday with my regular market updates.
Bob Farrell’s 10 Market Rules to Remember
- Markets tend to return to the mean over time.
- Excesses on one direction will lead to an opposite excess in the other direction.
- There is no era, so excesses are never prominent.
- Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
- The public buys the most at the top and the least at the bottom.
- Fear and greed are stronger than long term resolve.
- Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.
- Bear markets have three stages – sharp downturn, reflexive rebound and a drawn out fundamental downturn.
- When all the experts and forecast agree, something else is going to happen.
- Bull markets are more fun than bear markets, unless you are short.