Ever since stock markets existed, people have tried to find the Holy Grail as to predicting what a particular stock or index would do, how much and in which direction it would go and when would it go there.
There are technical analysts who might stare at a chart of price movements over a particular period of time and draw from that a conclusion as to future movements. Some tout seasonal tendencies for movements such as stocks fall in the fall, or “sell stocks in May and go away” as the saying goes, then buy them back in November. There is one for presidential cycles, who wins the Super bowl and even one based on the length of women’s skirts. The various prognostications obviously run the gamut from highly technical to ludicrous. Heck, I knew a woman who would shake some wooded cubes with symbols on them that only she understood and depending on the shake, would then buy or sell a certain security. Talk about leaving your money to chance! Hey, that reminds me of another game called gambling.
Actually the Wall Street Journal gained notoriety for the “dart board’ test. It went along the lines that a monkey with box of darts tossing them at the Journals’ stock ticker pages could make more money than most professional money managers. The WSJ had their employees play the monkeys and hurl the darts. The contest has been held 100 times and the pro’s lead by a score of 61 to 39 (Investorhome.com).
The returns in percentages are higher than the numerical score so don’t hire a group of monkeys and go out and buy some darts. But the difference between the two groups is embarrassingly smaller than one would have thought.
Other popular theories are the Santa Claus rally and the January effect. The bearded fat man in the red suit theory assumes people in the festive mood of holiday season would buy stocks based on how good they felt during this time of year. The time period affected would be the last week of December to the first two trading days of January of the New Year.
Another theory is the January effect. This is based on the idea that year end stock selling to harvest tax losses versus gains meant (Santa Claus effect put aside now) that more stocks than usual would be sold in December improve a better tax situation and then in January all that money would come flooding back into the markets.
Needless to say if any of these were foolproof the word would be out and the house would rig the game against such methods. Alas we see no such rules set by the authorities forbidding investors from betting their hard earned savings based on such silliness which tells us none of these theories hold much water.
Sure, perhaps some statistics might lean one way or another as statistics are rarely in perfect balance but the bottom line is none of these or any other methods or systems, manmade or computer generated can predict the ups and downs of markets, although there are Charlatans’ out there that would try and convince you otherwise.
The reason is the same as to why a degree in Economics is a Bachelor of Arts and not Bachelor of Sciences degree. It’s because the stock markets are said to be a study of human sociology and not a study of science. Science, like math, has definite truths, absolute cause and effects, and irrefutable conclusions given a certain set of circumstances. The movement of markets however, is just the sum of all the beliefs of all the millions of investors in it at any given time. And that my friend is sociology, not science.
Tell me what hundreds of millions of people will do at any given day in the market as a whole and the stock market will be your oyster. But then again, that’s not quite possible is it?
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at MKB Financial Services 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. MKB Financial Services and Cambridge are not affiliated.
His website is www.moneymanagementradio.com. California Insurance License # OL34249