Monday, August 24, 2015

Is my eye better than my algorithms?

I reluctantly gave an early bear market warning to a close family member on Thursday night, based on several indicators turning bearish and on the S&P 500 breaking down out of its 6-month price freeze.  I was reluctant because key long-term trends were still technically bullish, and because a particular pattern that preceded nearly every major market crash had not materialized.  In other words, by making a bearish call, I was going against the method that I programmed in to the "market bots".  Indeed, when I made the call, the response back was, "Why are the bots still bullish?  Are they stuck?"  I've actually always suspected that the bots needed a re-design - it's the main reason I haven't yet built a paid subscriber list to my email alerts.

Over the weekend I then saw additional indicators turn bearish, and noticed that the S&P 500 had broken down through yet another trend line, and on Sunday I emailed my official "I'm cashing out" message to extended family and close friends.  Again, the bots were still bullish.

Based on the lack of a crash signal and the sudden steep decline that usually occurs in corrections, I still expect that the current decline will turn out to be just the first bump at the start of a bear market similar to the 2000-2003 or 2007-2009 markets, rather than the beginning of a cliff-like crash a-la October 1987.  If the market does indeed crash from here, then I'll be very happy that I rode it out in cash, but I'll be disappointed that the purely mathematical methods I've been trying to develop failed to see the crash coming.  If, on the other hand, the market recovers part way and the bear market comes on more slowly (or the rally resumes!) then the slow reaction of the bots will be vindicated, and at least some my previous work will have paid off.

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