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Trader's Corner

The Value in Being a Doubting Thomas or Thomasina

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At times, I read four or five investment-related articles each and every night. I have sometimes poured over experts' predictions. I often filtered those predictions through what technical analysis told me about the charts and tried to remain enough of a doubting Thomasina to demand proof that each prediction was justified.

Still, the more letters behind the names of the authors and the more obscure the economic research they threw at readers, the more credence I gave their predictions. That's human nature. Sometimes their predictions influenced me more than they should, and that's human nature, too. All the writers on our staff want to educate readers, but we perhaps want to educate you most to question what you read, even if it's our own words, and to remain a Doubting Thomas or Thomasina. It's your money and your responsibility to determine how and when to trade.

Recently, when thinning files, I came across articles from July 2002 and May 2003. The article published in the summer of 2002 was the text of an interview with a man who was the vice president of a brokerage firm and editor of an investment newsletter. The interview concerned the then imminently expected Kondratieff Winter.

As the newsletter editor explained, Kondratieff was a Russian economist who studied capitalism from the Industrial Revolution through to the 1920's. He proposed that the economy cycled through a long period of expansion and contraction that lasted about 50 to 60 years. Later economists divided these cycles into four seasons, with the Kondratieff Winter being a time of deflation when debt would be washed out of the system. Unemployment would hit highs, currency crises could be expected, and stocks would lose ground. The best investments would be cash and gold according to this expert.

The person being interviewed expected that a Kondratieff Winter was upon us, and he expected gold to appreciate while stocks would likely plunge. He advised that traders be wary of staying in the stock market and thought it possible that the Dow might slip to 1200 if the markets were to parallel what happened between 1929 and 1932. While perhaps stopping short of predicting that the Dow was actually going to reach that level, he did not see any reason to believe that the stock markets might react any differently to that expected Kondratieff Winter than to the one that had hit in the 1920s. He advised staying out of bonds because of an expected rise in yields. He thought the economic downturn would impact that demand for crude, so that the U.S. might become self-sufficient in providing its own need for crude, and that commodities would not inflate.

Obviously, and fortunately, not all of those possible outcomes have been realized, although gold certainly has appreciated as the interviewee suggested it would. In mid-2003, yields did increase, but they then chopped around in a tight range until recently, much to the puzzlement of many. The Dow did not drop anywhere near 1200, crude zoomed higher, and commodities zoomed, too. Some have posed arguments that the dollar's decline has contributed to a somewhat false inflation of commodity prices, of course, but the fact remains that the scary possibilities suggested in that article have not, for the most part, yet been realized.

Neither have those in the May 2003 article that I found in my files. The author of the article published in May of that year is a professor of geophysics at UCLA, writing about intriguing research on a topic he called "cooperative herding and imitation." The professor and another researcher believed that the S&P 500 showed herding as it lost value from 2000 into early 2003. At the time I read the article, I was finishing writing a young-adult novel whose premise involved the mathematical basis behind human behavior, so the coincidence of themes caught my attention. The professor updated the graphs showing the predicted future of the stock market each month. In recent months, the professor's updates have included as many as 20 "equiprobable" outcomes and have cautioned that the forecasts are not deterministic. However, at the time I first read his material, the two researchers suggested the possibility that the S&P 500 could be headed into sub-700 levels in the summer of 2004 and graphs included only two possible scenarios, both rather dire.

His current predictions include a possible continued upward to sideway-upward (3 out of 20) movement of the SPX, as well as another drop to 2002 lows. Rereading the research, I still find myself intrigued by the mathematics behind the studies, but I also wonder how much the dire predictions in both of those articles, coming during and after the slump of markets into their 2002 lows, impacted my thinking about the markets during that period. I tend to be a bit of a Doubting Thomasina, but the fact that I copied and filed those articles among my other research must mean they impacted me, and I clearly remember being uncertain about the sustainability of the bounce when it began in the spring of 2003.

So, what's the point? We're hearing a lot of similar-sounding prognoses about the markets now. It's possible, of course, that manipulation of the markets just postponed that Kondratieff Winter and that it will be upon us soon. Lots of things are possible, but "possible" doesn't equate to "definitely." So, listen to those prognosticators who have earned your respect. Read some of the dire predictions and some of the more optimistic ones, then evaluate what you're hearing and reading. Study charts on your own. Use the information to protect positions or perhaps even evaluate whether you want to change your trading style into one that will be more protective of your assets.

While you're doing all this, however, keep the Doubting Thomas or Thomasina in you alive and active. No matter how educated the guess about market direction, no matter how experienced or educated the person giving the forecast, we all get surprised at times. Don't believe everything you hear or read.

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