stocks about to plunge

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larryswedroe
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stocks about to plunge

Post by larryswedroe »

http://www.cbsnews.com/news/just-ignore ... forecasts/

One of my favorite hobbies is collecting forecasts to hold the forecasters accountable


Larry
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Re: stocks about to plunge

Post by Sconie »

Danke!
I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant. - Alan Greenspan
Crow Hunter
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Re: stocks about to plunge

Post by Crow Hunter »

You typed "on pick" you probably meant "pick on."

:D
kenner
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Re: stocks about to plunge

Post by kenner »

I predict that prices of equities traded on the stock markets will sometimes go down and sometimes go up.

Please feel free to send me a sizeable amount of money if you disagree.
Last edited by kenner on Tue Jul 08, 2014 7:41 am, edited 1 time in total.
sscritic
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Re: stocks about to plunge

Post by sscritic »

larryswedroe wrote: One of my favorite hobbies is collecting forecasts to hold the forecasters accountable
Sounds boring to me. I don't spend my days looking through trash cans for tasty tidbits.
kaudrey
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Re: stocks about to plunge

Post by kaudrey »

Thanks for the link!
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HardKnocker
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Re: stocks about to plunge

Post by HardKnocker »

All the same it is a good idea to mentally prepare yourself for such an event so that you can have a rational plan and avoid rash moves.

There can be no doubt a correction will occur someday.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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nedsaid
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Re: stocks about to plunge

Post by nedsaid »

The markets have been "about to plunge" since the first day I invested in my first stock mutual fund on July 16, 1984. That was almost 30 years ago. Good thing I did not listen to the "experts" and the "forecasters." I would never have invested.
A fool and his money are good for business.
Jeff Albertson
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Re: stocks about to plunge

Post by Jeff Albertson »

June 9, 2014: 'Why You Need to Be in This Stock Market Now: Adams'
http://www.bloomberg.com/video/need-to- ... bG2AA.html
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baw703916
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Re: stocks about to plunge

Post by baw703916 »

Let me guess. It's a stock picker's market, isn't it?
Most of my posts assume no behavioral errors.
Novine
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Re: stocks about to plunge

Post by Novine »

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HardKnocker
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Re: stocks about to plunge

Post by HardKnocker »

nedsaid wrote:The markets have been "about to plunge" since the first day I invested in my first stock mutual fund on July 16, 1984. That was almost 30 years ago. Good thing I did not listen to the "experts" and the "forecasters." I would never have invested.
And it has plunged like a doozy three times since 1984:

1987, 2000, 2008. :beer
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
denovo
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Re: stocks about to plunge

Post by denovo »

There was a lot of chatter that the stock market would fall at the end of 2012, even some threads on this forum arguing for it happening, I am not going to list the reasons the forecasters gave, since some of them were political and off-limits for this site, but since Dec 2012 the market as measured by the SP 500 has gone up 40 percent.
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Howard Donnelly
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Re: stocks about to plunge

Post by Howard Donnelly »

Great article. Thanks, Larry.
Quincy
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Re: stocks about to plunge

Post by Quincy »

I do the same thing with all of the small value, momentum, and profitability forecasters. :)
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CABob
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Re: stocks about to plunge

Post by CABob »

One of my favorite lines is, "He has called 10 of the last 5 market downturns."
Bob
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Re: stocks about to plunge

Post by Toons »

"Whenever some analyst seems to know what he's talking about, remember that pigs will fly before he'll ever release a full list of his past forecasts, including the bloopers."

That sentence was worth reading the article :happy
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Clearly_Irrational
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Re: stocks about to plunge

Post by Clearly_Irrational »

There was some weakness in 2013 but by September my indicators were suggesting it was still too early to call, which looks to have been correct. My current data suggests we're still in a period of market order that started July 2011. Latest crash indicator reading is only 14.29/100 (over 30 is usually bad) Leading indicator swirlogram is showing a slowdown but it's still a long ways from a contraction. The current economic expansion is still within the normal range based on the historical length of prior expansions. Absent a significant triggering event, we're likely to continue on the current path for a while yet, I see no reason not to continue with a buy and hold strategy at this time.
Tom_T
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Re: stocks about to plunge

Post by Tom_T »

The most entertaining thing I read today was from a poster on another board who has been predicting a big correction for the past two years. Despite being wrong at every turn, he remains undaunted: "eventually I will be right." He just doesn't know when. ;)
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bertilak
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Re: stocks about to plunge

Post by bertilak »

Clearly_Irrational wrote:There was some weakness in 2013 but by September my indicators were suggesting it was still too early to call, which looks to have been correct. My current data suggests we're still in a period of market order that started July 2011. Latest crash indicator reading is only 14.29/100 (over 30 is usually bad) Leading indicator swirlogram is showing a slowdown but it's still a long ways from a contraction. The current economic expansion is still within the normal range based on the historical length of prior expansions. Absent a significant triggering event, we're likely to continue on the current path for a while yet, I see no reason not to continue with a buy and hold strategy at this time.
With erudition like that you've gotta be right! I'm taking action immediately.
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Re: stocks about to plunge

Post by Grt2bOutdoors »

In the words of JP Morgan "it will fluctuate". :D
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Re: stocks about to plunge

Post by denovo »

bertilak wrote:
Clearly_Irrational wrote:There was some weakness in 2013 but by September my indicators were suggesting it was still too early to call, which looks to have been correct. My current data suggests we're still in a period of market order that started July 2011. Latest crash indicator reading is only 14.29/100 (over 30 is usually bad) Leading indicator swirlogram is showing a slowdown but it's still a long ways from a contraction. The current economic expansion is still within the normal range based on the historical length of prior expansions. Absent a significant triggering event, we're likely to continue on the current path for a while yet, I see no reason not to continue with a buy and hold strategy at this time.
With erudition like that you've gotta be right! I'm taking action immediately.
I am 99 percent this was a joke, but the sad thing is how many people in the general public would act on this.
"Don't trust everything you read on the Internet"- Abraham Lincoln
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Clearly_Irrational
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Re: stocks about to plunge

Post by Clearly_Irrational »

denovo wrote:I am 99 percent this was a joke, but the sad thing is how many people in the general public would act on this.
I wasn't joking, I'm pretty sure Bertilak was, though if someone took the offered advice "continue with a buy and hold strategy" then they'd hardly be doing badly thereby.
denovo
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Re: stocks about to plunge

Post by denovo »

Clearly_Irrational wrote:
denovo wrote:I am 99 percent this was a joke, but the sad thing is how many people in the general public would act on this.
I wasn't joking, I'm pretty sure Bertilak was, though if someone took the offered advice "continue with a buy and hold strategy" then they'd hardly be doing badly thereby.
I meant the stuff before the final conclusion
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slbnoob
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Re: stocks about to plunge

Post by slbnoob »

Clearly_Irrational wrote:There was some weakness in 2013 but by September my indicators were suggesting it was still too early to call, which looks to have been correct. My current data suggests we're still in a period of market order that started July 2011. Latest crash indicator reading is only 14.29/100 (over 30 is usually bad) Leading indicator swirlogram is showing a slowdown but it's still a long ways from a contraction. The current economic expansion is still within the normal range based on the historical length of prior expansions. Absent a significant triggering event, we're likely to continue on the current path for a while yet, I see no reason not to continue with a buy and hold strategy at this time.
I didn't quite understand that but you must know what you're talking about. I'm convinced.
mptfan
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Re: stocks about to plunge

Post by mptfan »

Clearly_Irrational wrote:There was some weakness in 2013 but by September my indicators were suggesting it was still too early to call, which looks to have been correct. My current data suggests we're still in a period of market order that started July 2011. Latest crash indicator reading is only 14.29/100 (over 30 is usually bad) Leading indicator swirlogram is showing a slowdown but it's still a long ways from a contraction. The current economic expansion is still within the normal range based on the historical length of prior expansions. Absent a significant triggering event, we're likely to continue on the current path for a while yet, I see no reason not to continue with a buy and hold strategy at this time.
Do you have a newsletter? How much does it cost to subscribe?
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Clearly_Irrational
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Re: stocks about to plunge

Post by Clearly_Irrational »

slbnoob wrote:
Clearly_Irrational wrote:There was some weakness in 2013 but by September my indicators were suggesting it was still too early to call, which looks to have been correct. My current data suggests we're still in a period of market order that started July 2011. Latest crash indicator reading is only 14.29/100 (over 30 is usually bad) Leading indicator swirlogram is showing a slowdown but it's still a long ways from a contraction. The current economic expansion is still within the normal range based on the historical length of prior expansions. Absent a significant triggering event, we're likely to continue on the current path for a while yet, I see no reason not to continue with a buy and hold strategy at this time.
I didn't quite understand that but you must know what you're talking about. I'm convinced.
1) Market order: The market is a levy flight rather than a random walk. Due to this, the market tends to have long periods of order where the normal buy and hold rules work appropriately. Generally this can be seen by plotting S&P 500 price against dividends (Example 1971-Present):

Image

The first crazy looking section is the tech bubble while the second one is the housing crash. When the trend breaks you have a period of disorder then things settle down into a new trend. (That's the flight part of the levy flight) RIght now we're in the section after the whole looping back on itself part ended, which as you can see is a period of order. The current price/dividend ratio is 52.42 which is within the normal range for this trend. If we had several readings over 56.27 that would be a pretty strong indicator that the current trend had broken.

2) Crash indicator: After reading through the literature I was able to identify the following indicators that seem to be pretty reliable in detecting recessions/market crashes: Federal reserve sign changes, USSLIND, FRED recession probability, CFNAI-MA3, Schiller PE10, Yield Curve Inversion and Corporate Dividend Cuts. By combining them into a single reading you get a fairly straightforward warning signal as to whether things are likely to go bad soon (orange bars are recessions):

Image

3) Swirlogram: By plotting the most recent six months worth of leading indicator readings against their velocity you get a fairly reasonable view of how things are looking coming up (Starting in the lower left quadrant and going clockwise the readings are Contraction, Recovery, Expansion or Slowdown):

Image

4) Economic expansions always end eventually and since they're mostly based on the business cycle they tend to be fairly predictable:

Image

Based on a normal distribution the likely end dates are:

Dec 2007 Last Peak
Aug 2012 Mean
Feb 2014 Linear Trend
Jan 2015 One Sigma
May 2017 Two Sigma
Oct 2019 Three Sigma

So there is about a 95% chance that we'll have a recession prior to May 2017, while the chance of having one by January are much lower at only 68%.

If the market were a random walk then all of this would irrelevant, since it's a levy flight instead there are rare instances where it may be possible to intervene effectively. In my opinion it makes sense to keep an eye out, especially since the main thing all this tells you most of the time is "do nothing...do nothing...do nothing...". I personally find it comforting to know that even if I wanted to market time, now isn't the time to do so. Someone else who has less liking for analysis may decide to just grit their teeth and bear it instead and for them that may be the best choice.
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Clearly_Irrational
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Re: stocks about to plunge

Post by Clearly_Irrational »

mptfan wrote:Do you have a newsletter? How much does it cost to subscribe?
No, but I could probably make a go of it if I really wanted to. The problem is that the incentives in running a newsletter are opposed to the message I'd want to send.
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Re: stocks about to plunge

Post by nisiprius »

Very nice stuff, clearly_irrational, and I learned a new term from you today: "Lévy flight." http://en.wikipedia.org/wiki/Lévy_flight
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Clearly_Irrational
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Re: stocks about to plunge

Post by Clearly_Irrational »

nisiprius wrote:Very nice stuff, clearly_irrational, and I learned a new term from you today: "Lévy flight." http://en.wikipedia.org/wiki/Lévy_flight
Thanks! I actually owe you credit for the composite crash indicator. I was tracking a list of indicators previously but you kept asking a lot of tough questions so I kept having to be more and more objective/quantifiable. Originally I didn't think I could put an exact number to it, but under pressure I eventually came up with a reasonable method to do so. As it turns out several of my original indicators had to be thrown out since they weren't as predictive as I originally thought.

Market order I got from the Political Calculations blog.

The swirlogram method I re-puruposed from some Goldman Sachs stuff that kept getting posted on Zerohedge. (I just applied it to different data)

The NBER recessions analysis is all me, though I'm sure someone elsewhere has done virtually the same thing.
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matjen
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Re: stocks about to plunge

Post by matjen »

I agree with Nisi. Although this type of post isn't usually looked upon with great favor in this forum, I think it is interesting and I like the way you use it to double-check a buy & hold mentality rather than just outright time the market in and out. Please keep us posted when things get a bit more dicey in your model(s).
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Clearly_Irrational
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Re: stocks about to plunge

Post by Clearly_Irrational »

matjen wrote:I agree with Nisi. Although this type of post isn't usually looked upon with great favor in this forum, I think it is interesting and I like the way you use it to double-check a buy & hold mentality rather than just outright time the market in and out. Please keep us posted when things get a bit more dicey in your model(s).
For me it works, I could see how for some people it might lead them into bad behavior instead. I ended up on Bogleheads because the evidence lead me here not from any philosophical choice but not everyone makes decisions that way. I'll definitely keep you posted, if for no other reason than it gives us something fun to talk about. Besides, it's nice to have a bunch of smart people poke holes in your theories, if they survive they end up being much more robust.
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Re: stocks about to plunge

Post by zaboomafoozarg »

Image
Last edited by zaboomafoozarg on Tue Jul 08, 2014 10:26 pm, edited 1 time in total.
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DonCamillo
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Re: stocks about to plunge

Post by DonCamillo »

I stay the course. But I have to admit that the only investment I feel really good about in today's market is paying for my grandchildren's music lessons.
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nedsaid
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Re: stocks about to plunge

Post by nedsaid »

Yes HardKnocker, I remember 1987. I lost a few hundred dollars that day and my world just crashed. I may as well have lost millions of dollars. Would the sun ever shine again? It seems silly now but my emotions were real and the event really made an impression on me. I just laugh when people say they have high risk tolerance and want a 100% stock portfolio. One needs their first bear market to find out if that is really true and also discover their true risk tolerance.

2000 and 2008 were atleast tolerable because I had some of my money in bonds. I also had an emergency fund, which I am a big believer in. Even today I like good old fashioned money in the bank.

An emergency fund and some bonds in your retirement portfolio sure come in handy from time to time. As in 1987, 2000, and 2008.

Thanks for your comments.
A fool and his money are good for business.
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Re: stocks about to plunge

Post by asset_chaos »

"stocks about to plunge"

Zippy, this would make my rebalancing decisions so much easier!
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Re: stocks about to plunge

Post by oldzey »

Things are more like they are now than they ever were before.
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pswift
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Re: stocks about to plunge

Post by pswift »

This is a great discussion.
Larry, I enjoyed your article, and really appreciate your perspective. Holding the forecast gurus accountable is a great way to put all of the financial news into perspective.

Clearly_rrational, your market analysis was also very interesting and helpful. That kind of analysis also helps me to stick with a buy and hold strategy.
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Re: stocks about to plunge

Post by denovo »

zaboomafoozarg wrote:Image
Image
"Don't trust everything you read on the Internet"- Abraham Lincoln
Awsi Dooger
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Re: stocks about to plunge

Post by Awsi Dooger »

Laughable. It reminds me of goofs in Las Vegas who get a kick out of claiming that the public always loses on sports bets. "Bet against the public." They compile a handful of examples that support their version and conveniently ignore anything else. They hold up the so-called evidence in a forum they know is predisposed to support the bias, and accept the undeserved applause.

A full sample would reveal very close to 50/50 accuracy. I actually did that for a 6 month period when I worked at the Horseshoe, to gauge the validity of "bet against the public." Every day I wrote down the games with the highest percentage of small tickets (<=$33) on one side, and also the games with the highest percentage of big tickets (>=$550) on one side, the so-called wise guys. At the end of 6 months the win percentage was virtually identical, both samples just north of 51%. The only difference was the big bettors generally beat the average pointspread on the game in question, while the small bettors had slightly worse. Otherwise the small bettors, the public, actually had a slightly superior "opinion." There were more numbers to produce a winning ticket on their side than were available for the wise guy games.

Somebody mentioned Nate Silver on this site recently, with his related theory that predicting weather in the short term is viable but there are simply too many unforeseen variables in play to accurately do so long range. I believe that's exactly correct, and can be applied to stocks. If done correctly and without bias, I would expect any compilation of market predictions to fare well if aimed at a short window and lose steam if focused too far.

Nate Silver ruined political wagering, BTW. Previously it was cupcakes. The oddsmakers somehow looked at political margins no differently than a football or basketball game. Since a 2 point favorite carries a money line of -135, then a political race with a leader supposedly in a shaky position with "only" a 2 point average edge in the polls has to be only a small favorite, right? What could go wrong? It's still unbelievable to this day. I took advantage beginning in 1992 but I should have plunged far more once I knew the advantage was there. I remember posting on political sites in the early 2000s that somebody would have to turn up in the media and mathematically ruin the misconceptions. Now those odds are exponentially greater on the favorite.
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