Sign in     Like us on Facebook Follow us on Twitter Watch us on YouTube

News and Blog

Join 5000 other sharemarket traders for regular blog updates!

Browse to a category

Blog Search

Is the world really better than ever?

B the end of last year, anyone who had been paying even passing attention to the news headlines was highly likely to conclude that everything was terrible, and that the only attitude that made sense was one of profound pessimism – tempered, perhaps, by cynical humour, on the principle that if the world is going to hell in a handbasket, one may as well try to enjoy the ride. Naturally, Brexit and the election of Donald Trump loomed largest for many. But you didn’t need to be a remainer or a critic of Trump’s to feel depressed by the carnage in Syria; by the deaths of thousands of migrants in the Mediterranean; by North Korean missile tests, the spread of the zika virus, or terror attacks in Nice, Belgium, Florida, Pakistan and elsewhere – nor by the spectre of catastrophic climate change, lurking behind everything else. (And all that’s before even considering the string of deaths of beloved celebrities that seemed like a calculated attempt, on 2016’s part, to rub salt in the wound: in the space of a few months, David Bowie, Leonard Cohen, Prince, Muhammad Ali, Carrie Fisher and George Michael, to name only a handful, were all gone.) And few of the headlines so far in 2017 – Grenfell tower, the Manchester and London attacks, Brexit chaos, and 24/7 Trump – provide any reason to take a sunnier view. 

So What Does This Mean?

In my junk folder I have for the past upteen decades been getting random charts by a group called Chart of the Day. Surprisingly, I dont get them everyday – so the implication that you get a chart everyday that is interesting is perhaps a little bit of an oversell. This morning I go the following piece of wisdom –

c2

This chart as the title suggests looks at the S&P 500 PE ratio back to the turn of the century. Putting aside the obvious gaping methodological flaws such as the S&P500 was only started in 1957 I do always find these sorts of things interesting. Markets and their history should be a topic of investigation for every trader, simply because there is nothing new. Bubbles and crashes have been a feature of markets since they began and the driving force behind such things has always been the capriciousness of market participants. Curious as to what our own market looked like I dug up some data from the folks at Market Index and plotted the local PE ratio against the All Ords to see what I could see.

Capture

On the chart above I dropped a series of vertical lines – the three black ones denote a time when valuations according to the markets PE ratio could be considered extreme, the red one is the GFC. Pundits who look at valuation models work on the notion that markets or their component equities have a fair valuation and deviations from this point indicate that something is either overvalued or undervalued. Decisions are then made upon this interpretations. The first black line is easy to identify – its the 1987 crash.  The second one took me a little while to remember until I remembered the tail end of the 1991/2 recession combined with the banks nearly sending themselves under after property bit the dust.  The third black line is the tech wreck, The question when looking at any methodology is what value does it add to your decision making.  This is an important question since our decision making is bounded by the time we have to make the decision, the amount of information we have and our cognitive ability. None of these components can be infinite so our decision making is always somewhat half arsed. However, we need to add to this the notion of decision fatigue. It is estimated that during an average day we make anywhere between 20,000 and 25, 000 conscious and unconscious decisions and each of these decisions extracts a toll. Decision making is not a free ride, everything has a cost. Therefore efficiency of decision making is of paramount importance. If you have to force a decision then you are merely adding to your own mental loading without achieving anything.

As to whether the chart above tells me anything I dont already now about market extremes is doubtful As to whether it adds anything to my overall view of the world and approach to trading I am certain it doesn’t. But your mileage may vary.

Trend Following Is Dead…blah.. blah.. blah…

Before I head off to Fiji for a week I was cleaning out an image archive I keep when I came across this chart of Poseidon from the 1960’s.

Screen Shot 2014-06-17 at 9.53.56 pm

Source: Reserve Bank of Australia

Despite what people say nothing ever changes…..

Jesse And The Quake

At eight o’clock in the morning of Wednesday April 18th 1906, Jesse Livermore was sound asleep in his New York hotel room after arriving back late from Palm Beach the previous evening.

3000 miles away, across the country in California, it was five o’clock in the morning and the city of San Francisco slept contentedly. Barely two minutes later, the earth shook and all 410,000 citizens were awoken as the San Andreas Fault suddenly ruptured. There were two quakes. The initial quake was hardly noticeable but, 20 seconds later, the earth tremored for 42 seconds at force eight, just about as bad as it gets. It shattered the surface of the earth for a length of 296 miles across California. At its epicentre, the ground moved 28 feet.

More here – The Reformed Broker

What moved share prices in the nineteenth-century London stock market?

Abstract

Using a new weekly blue-chip index, this article investigates the causes of stock price movements on the London market between 1823 and 1870. We find that economic fundamentals explain about 15 per cent of weekly and 34 per cent of monthly variation in share prices. Contemporary press reporting from the London Stock Exchange is used to ascertain what market participants thought was causing the largest movements on the market. The vast majority of large movements were attributed by the press to geopolitical, monetary, railway-sector, and financial-crisis news. Investigating the stock price changes on an independent list of events reaffirms these findings, suggesting that the most important specific events that moved markets were wars involving European powers.

More here – The Economic History Review

Before and After Chuck Berry

Chuck Berry himself would be the first to admit he didn’t invent rock ’n’ roll, but he came to define it in a series of iconic singles made between 1955 and 1959.

Mr. Berry wrote almost all his hits himself, and he drew from the music he loved — from the blues and boogie to country and Calypso. The result was a hybrid sound that, in 1955, was just beginning to be called “rock ’n’ roll.”

Here, an audio guide to just a few of his revolutionary songs: what came before, and what came after. Listen to the sound of rock ’n’ roll being made.

More here – The New York Times

A Basic Misunderstanding

The chart below is from a site called Spurious Correlations, it takes seemingly disparate facts and matches them together to create the illusion of a positive correlation. It is a simple and effective way of illustrating the problem of mistaking causation for correlation which is constant problem in the way people both think and view data.

correlation

If you were to take this at face value you would accept that there is a link between the number of films that Nicholas Cage has appeared in and the number of people who drowned by falling into a pool. You could even stretch the data a little and suggest that these drownings were not an accident and anyone who had even seen a Nicholas Cage film would nod sagely in agreement. Now consider the chart below which looks at significant historical events and the rise of the Dow.

This rather imposing looking chart is the centrepiece of an article titled The Dow’s tumultuous 120-year history, in one chart which appears on the MarketWatch site.  The article boldly claims the following –

At its simplest, the chart proves once again that over the long term, the stock market always rises because “intelligence, creativity, and innovation always trump fear,” according to Kacher.

No it doesnt – this is mistaking causation and correlation. What the chart shows is the profound upward bias of the Dow and this is the driving force of the index moving higher. This is an example of survivor bias nothing more. The original Dow components were as follows

Dow

It is obvious that these components would change over time and that this change would drag the index higher as non performing or irrelevant issues were moved out. The notion that it is innovation that is moving the market higher is not true and can be illustrated by the simple fact that Apple arguably the most innovative technology company of recent times was only added to the index in 2015. Google whose technology permeates everyday life and Amazon who have revolutionized retailing are nowhere to be seen. The Dow has remained technology light since its inception – if technology and creativity were the drivers of the market then these new companies would be added to the index very quickly.

It is quite a simple matter to generate events stick them on a chart and say they have some significance but simply saying it doesn’t make it true. As I explored last week news and significant events tends to have a complex relationship with an index and the question of does news move markets has been answered in the negative.

The article then goes onto make the bold claim –

 Investing is more challenging than brain surgery,” Kacher told MarketWatch.

I will leave others to ponder the idiocy of this last quote.

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.