You don’t need a weatherman

You don’t need a weatherman

By Ilene 

Paul Price argues that meteorologists and many stock analysts ‘predict’ the future using methods by which they can never be wrong. For example, this five day weather forecast speaks in percent chance language. 

Forecast

 

For Monday, the forecast is basically saying it might rain; there’s even a higher probability for rain on Monday than for Tuesday. And it might rain on Tuesday. But whether it rains, or does not rain, on Monday, or Tuesday, it does not matter – the outcome doesn’t prove or disprove the forecast – the forecast can be right either way. 

Reading the January 21, 2013 issue of Barron’s, Paul compared its article presenting the market forecast of Jeffrey Saut, Chief Investment Strategist at Raymond James, to a weather forecast:

“The Streetwise column noted that the stock market enters a bull phase only after the transports and the broader DJIA both make new highs. 

“There’s a 25% possibility we’re in a new secular bull market, and no one believes it.” 

Huh?

Paul continued:

“Streetwise’s author Jacqueline Doherty then noted that the 90% up/down volume ratios of December 31, 2012 and Jan. 2, 2013 supported his case as that type of action presages higher prices 83% of the time over the next 30-days and 100% of the time over the following three months.”

Ms. Doherty’s bullish assessment for higher prices was at 83% in 30 days and 100% in three months. This was noted to support Mr. Saut’s case of a 25% possibility for a new stealth secular bull market – which means, by deductive reasoning, a 75% possibility for no new secular bull market. If Mr. Saut’s and Ms. Doherty’s positions somehow support each other, the connection was never made in the article. 

Stock recommendations can be similarly hedged. Analysts can say that a stock has strong momentum and they can see it trading many fold higher, while also indicating that the price is discounting several years worth of expected growth. If a stock keeps rising, the analyst was right – the momentum continued. If it reverses and sells off, the analyst was right – its price was too high to support its actual growth rate. 

Train yourself to buy and sell based on whether shares are cheap or expensive. Tune out the noise. Focus on valuation.

Speaking of tunes….

Screen Shot 2013-02-04 at 1.50.25 AM 

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