The markets have obliged me by roughly following the schematic I outlined in July in "Heading for the Hills"and in "Second Half". My thinking was based upon the annual cycle or "seasonal" pattern of US stock market prices as well as the "decennial cycle" in which the year ending in "7" in each decade is typically more muted in price amplitude. The market did peak in mid July as anticipated or "hoped" and made significant corrections into lows in August and October.
Perhaps I'd be wiser to rest on my laurels and not push my luck. But November and December are the most reliable times of the year to be long. The Dow Jones seasonal runs from 1928 to present and the SPX seasonal from 1950 to present (see below).
I have to confess--since you've already read it--that part of my willingness to accept a falling market for this past summer, and early this fall, was due to "concerns" about the economy in the US. However, recent data suggest that the economy is continuing to run fairly well. I am not an economist, but the few economists that I follow regularly seem to be agreed that things are not that bad. It's hard not to hear news wherever you go, and as usual it's all bad. But that's normal for, as Barabara Tuchman the British narrative historian said,
"A ...hazard, built into the very nature of recorded history, is overload of the negative: the disproportionate survival of the bad side--of evil, misery, contention, and harm. In history this is exactly the same as in the daily newspaper. The normal does not make news. History is made by the documents that survive, and these lean leavily on crisis, calamity, crime, and misbehavior, because such things are the subject matter of the documentary process--of lawsuits, treaties, moralists' denunciations, literary satire, papal Bulls......."
Normal or happy events are rarely heard from, but most of the unhappy events are heard and recorded. This is what Nassim Taleb, author of my current favorite, "The Black Swan", calls the "fallacy of silent evidence". Namely, we humans tend to make value judgments and form beliefs based on what is presented to us as definitive ancient and current outcomes to events. But in fact far more outcomes are lost to the news and to history than are saved to it, and so we often base many of our opinions upon what I would call the Darwinian "survival of the foulest" outcomes.
When we hear this concept we almost all will think, "of course", but we don't change our methods of establishing opinions. However, one surprisingly good outcome of this defect of human nature is that it gives rise to the profitable technique of sentiment analysis. In speculation and investing we don't need to collect millions of personal anecdotes or news items to find out how gloomy market participants currently are. We can measure the degree of ambient gloom and doom by seeing what the two major classes of market participants--the "retail" investors and the knowledgeable professional insiders-- are actually doing with their money. And we can do this each day and to a limited extent within each day.
All that said, my lean or bias toward accepting the historical record of the annual cycle or seasonal pattern for the Dow and SPX for the second half of 2007 was at least partly formed on the basis of economic hearsay and my own non-professional evaluation of the economy. I let the gloom and doom of late June's economic hearsay influence my investment approach, and it was wrong, as the economy did not weaken until now as hearsay predicted.
However, the seasonal pattern worked anyway! So I have learned a lesson, which I will doubtless forget and then allow myself again to become prey to news and unbalanced current opinions. As the late Peter Cook's character, Sir Arthur Streeb-Greebling, exclaimed in Good Evening: "Oh, yes, I've learned from my mistakes and I'm sure I can repeat them exactly." Read Nassim Taleb to learn more about how to improve upon one's human nature by means of sceptical empirical testing and prove Sir Arthur wrong, if you can.
The US markets, and many around the world, fell nearly back again to the October 22 lows late this past week. The historic odds favor a rise to the end of the year, and sentiment of the statistical type, based on what market players are actually doing, supports that idea despite, or, perhaps "because of", current preoccupations with gloom and doom stories based on the credit issue.
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