Friday, August 15, 2008

Long Term Forecast vs. Market Timing

Several people have asked me about the significance of my long-term forecast of Dow 8500/ S&P 940. This prediction is based on a theory which has little to do with my current market timing strategy. I love to use analogies on this blog, so here's another one: hurricane forecasting!

Every year the Climate Prediction Center (CPC) of the National Oceanic and Atmospheric Administration (NOAA) makes an all-encompassing forecast for the upcoming Atlantic hurricane season. This year they're predicting an "85% probability of an above-normal hurricane season," and they even go so far as to predict that there will be 14-18 named storms, 7-10 Hurricanes, and 3-6 Major Hurricanes.

Now, what does this hurricane forecast mean for residents in the Southeast and Gulf Coasts? Suppose that 10 hurricanes occur by September, which is the top limit of the forecast; should people in Florida breathe a sigh of relief and toss their emergency kits? Of course not. After all, this forecast ends up being wrong more often than not. By the same token, if zero hurricanes have occurred by September, that doesn't mean that 7 will suddenly pop up in order to achieve the forecast number.

The truth is that NOAA's long-term forecast is essentially useless to someone living in New Orleans, Brownsville, or Tampa. It's the short-term weather data that saves lives, and it comes from satellite images of the Atlantic Ocean, weather radar, and humidity, temperature and pressure measurements from the storm-chasing planes. The bottom line is that if a hurricane is heading your way, then you should "invest" in a hurricane strike. However, if the Atlantic and Gulf are clear, and it's November, then don't bother.

So think of my long-term forecast as NOAA's interesting but not-so-practical seasonal hurricane forecast. Sure, if the market ends up bottoming exactly where I predict, then I'll be crowing about it. But my buy and sell signals, and bearish vs. bullish stance, come from the market indicators that I scan every day, and aren't affected by the forecast.

10 comments:

linc campbell said...

In a prior post, didn't you link your prediction to the low dividend rate of the indexes and using a fair value calculation arrive at the 8500ish numbers?

That may have been a dream I had.

Jody said...

Linc,

I don't think I've ever used the term "fair value," but I did note in a previous post that the dividend yield of the Dow would finally reach 3% again if the Dow fell to 8500:

Coincidentally, a return to Dow 8500/ S&P 940 levels would raise the dividend yield to the 3.0% - 3.5% range, which is finally back in the historically reasonable range of 3% to 6%.

Dan said...

Jody,
I find Karl Eggerss website useful.

Please comment on his latest blog entry with regard to whether this is a sucker rally or not @:

http://keggerss.wordpress.com/2008/08/15/sucker-rally/

thanks!

Jody said...

I'm not sure exactly what Karl is saying. I see many commentators talk out of both sides of their mouths, and this kind of reminds me of that. "It's a weak rally, but it may continue." "The market may be turning around, or not." The words "but" and "however" collectively appear 14 times in that post. I'm not in the habit of criticizing other bloggers, but you asked me my opinion...

Dan said...

Jody,
Your reponse is exactly what I came away with and I greatly appreciate your taking the time to comment!

So just to be clear, you are still bearish dispite this rally we are in and planning on shorting at some point?

Dan

Jody said...

Precisely.

Dan said...

Jody,

Interesting reading below - Is it possible that "they" could curtail the direction of the "free" markets and therefore prevent a decline in the stock market as you predict?

http://www.webofdebt.com/articles/wag_the_dog.php

Jody said...

Um... no. When someone is quoting Mikhail Gorbachev (who was humiliated by the collapse of the USSR under his rule) as proof that the U.S. is responsible for violence in Ossetia, then she's the last person you want to be getting financial advice from. Conflict in Ossetia dates back at least one century, well before Dubya was in office.

Don't forget that just about every eastern European/ southwest Asian country has been invaded by Russian/Soviet tanks at one point or another: Czechoslovakia in 1968, Afghanistan in 1978, their own capital in 1991, the Pristina airport in Serbia in 1999. That's about once every decade, so it was "time" for another parade of Russian armor - kind of like bear markets show up at quasi-regular intervals.

Hey! Bear market... Russian bear... Coincidence?!?!

Anyways, Federal intervention is as old as the stock market itself. In a previous comment section I point out:

For example, the FDIC was created in 1933, and the Securities and Exchange Commission was created in 1934 as a response to the 1929 stock market crash - talk about intervention!

It seems to me that Ellen Brown has no historical perspective. That can be a costly blind spot when it comes to investing.

Anonymous said...

Great, great latest post.
Factors suggest but do NOT absolutely define an 8500 bottom; current "rally" indeed is a sucker rally - we're still in an overall bear climate.

I love your analogies!
The KD

Jody said...

Thanks, KD. The day I run out of analogies is the day I stop blogging!