A most notable quote of Ed Seykota, pioneer trend follower and specialist in trade control, comes from Jack Schwager's "Market Wizards". Schwager asked Seykota:
"What are your thoughts about using fundamental analysis as an input in trading?"
Seykota made this now famous reply:
"Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them "funnymentals." However, if you catch on early, before others believe, then you might have valuable "surprise-a-mentals."
My understanding of this was then and is now that the daily news or even weekend reviews that we are inundated with is totally worthless. If reporters know and are telling you something, it's been known for a while and already acted upon. I rarely watch TV except for sports and weather which can be "real " news. And I never watch TV market programs. Kill the TV used to be the motto of thinking people, and it's a good one. Keep your mind clear and not distracted or disturbed by bad news which is 95% of what's reported.
Seykota's second sentence gets less attention and respect, but is of equal importance: gaining some insight into future moves ahead of the crowd. If we have some general idea about where markets are going over the next few years, and WHY, we might have a valuable "surprise-a-mental".
In the late 1990's when I was buying gold, chat site cyber-friends (and enemies) used to tease or scold me for being so stupid. The "surprise-a-mental" I had was knowledge of the Economic Long Wave Cycle of approximately 50 years which was close in time to making a low. Obviously I couldn't tell anyone or myself the day, month or even precisely the year, but I was pretty sure it would be between 1998 and 2003 on the schedule it had been on since the late 18th century, and likely long before. So buying gold gradually on weakness and ahead of the crowd was a good idea.
Also buying things exposed to China was a good idea since they had a lot of people to "demand supply". I bought my first China fund in 1996 and a few nndividual Hong Kong stocks. That turned out to be way too early, and 1997 was not kind to them. But I wasn't overloaded or leveraged in either category, so I could hold and wait.
If one uses technical analysis, including chart analysis and rocket science indicators, and sentiment, with the Long Wave as a "surprise-a-mental" backdrop, and then ignore the noise of news and exercise patience, one can make a lot of money like Ed Seykota who doesn't even, or didn't then at least, have a qu0te screen on his desk.
So I decided last night to try to forget the news, which is uniformly horrid, and just look at a few very simple technical lines and numbers on charts of the SP500. I looked to see if there was any connection between the big SP500 crashes of the past 2o years: 1987, 200-2003, and 2007-2008.
I can imagine some readers are thinking, "Tom, I can see 1987 and 2000-2003 being on the crash chart, but 2007-2008 doesn't make the cut even though it took 20% off many stock indexes". Good point, but let me show a sentiment chart that makes a good case for 2007-2008 as "crash-eligible". this comes from cyber-friend, Kirk Lindstrom (click on chart for larger image):
The ten week AAII bulls minus bears indicator is lower than it has been at any time since 1991 during the Savings & Loan crisis, which this one resembles in so many ways. Investors are more bearish than they were at the 2002-2003 lows! So I do think the drop into January, and even since, qualifies as a crash, at least psychologically.
Here is a log chart of SP500 futures which draws a line from the 1987 low through the 2002-2003 lows, and what do you know? SP500 touched it on January 22, 2008. Granted that this might not convince a judge in a law court, but it is is quite suggestive when both a sentiment chart shows massive bearishness at a low and a percent line on a log chart of stocks connects the three biggest sentiment crashes of the past 20 years.
Last I'll show something more tenuous but which could indicate what has been going on since the market made a low on January 22. This is daily chart of SP500 futures again with the numbers and alphabet letters us in Elliott Wave counting. It fits (but isn't proved) with the moves from January 22 being a bullish first wave up and a corrective wave down. No proof. Just suggestive. But if you forget the news, it might just be that the SP500 is going up again. Stay tuned to the chart, not the news.
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