
Scary 1929 market chart gains traction - andv
http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11?dist=lcountdown
======
lutusp
This sort of scare tactic means nothing without an effort to explain the
correlation. Without a testable theory, it's meaningless data mining.

My guess is someone on the inside has already shorted the market just before
press time, anticipating the effect the article will have among
unsophisticated investors. And guess what, boys and girls? That kind of
"insider trading" is legal -- you can say anything you want in the press, and
you can position yourself to benefit from your own article in advance. It's
all perfectly legal.

~~~
enoch_r
Shorting the S&P500 in the hopes that a MarketWatch article will have a
significant effect on the price despite the $14T market cap and high liquidity
would be an absurdly risky and low-return way to make money. That's why people
who run these sorts of scams focus on penny stocks with low market caps,
relatively unsophisticated investors, and low liquidity.

Not that I disagree that the article is meaningless data mining--I just think
stupidity is a better explanation than conspiracy.

Edit: I should have used the DJIA instead of the S&P500, since that's what's
referenced in the article, but the same points hold.

~~~
lutusp
> I just think stupidity is a better explanation than conspiracy.

That possibility must always be given its due weight. :)

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mcphage
I think that if this chart does have predictive power, the implications are
far stronger and weirder than just "the stock market is going to drop next
month". If there is a match to these random ups and downs, then why? What does
each of them signify?

Luckily, it has no such predictive power.

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drcode
Yeah, patterns like this are much easier to find than you'd think and don't
have any predictive value.

Yes, the market could take a dive (or shoot upwards) any time, but not because
of the pattern in this chart.

~~~
officialjunk
i HATE "news" like this. we know it's not correlated, but it's scary how the
media can essentially manipulate the market. hope this doesn't get covered by
more popular news outlets.

------
wcgortel
FYI, with charts like this it's kind of important to do some quantitative
work, not just take a look. Check out this taxonomy of charts:

[http://blogs.cfainstitute.org/investor/2013/05/15/an-r-
squar...](http://blogs.cfainstitute.org/investor/2013/05/15/an-r-squared-
chart-taxonomy-seeing-is-not-believing/)

~~~
samolang
Apparently as of a couple weeks ago the R-squared value was ~90%.

[http://www.marketwatch.com/story/ghost-of-1929-haunts-
as-199...](http://www.marketwatch.com/story/ghost-of-1929-haunts-
as-1997-style-crisis-hits-2014-01-29)

~~~
GFK_of_xmaspast
I would want to see what happens to r2 when you drag the 1929 data across the
last 80 years of the DJIA or whatever other index you want before I get
excited about a 0.9 result.

------
jostmey
If you look hard enough in a large enough data-set you will eventually find a
correlation. It is just like the experiment where a dead fish placed in an MRI
machine was asked to identify the emotional state of a person in a picture.
Guess what happened.

[http://blogs.discovermagazine.com/neuroskeptic/2009/09/16/fm...](http://blogs.discovermagazine.com/neuroskeptic/2009/09/16/fmri-
gets-slap-in-the-face-with-a-dead-fish/#.UvpXTVJdWbV)

------
api
I am not particularly a gold bug or even a fan of this site, but I have found
this chart interesting for a long time:

[http://pricedingold.com/charts/DJIA-1900.pdf](http://pricedingold.com/charts/DJIA-1900.pdf)

The pattern is fairly well established at this point. I am not sure exactly
what it means and I'm not sure the obvious interpretations that most people
would have are correct, but it definitely argues for some sort of pulsing
macro business cycle.

My own hypothesis is that gold's value vs. paper/stocks is a decent indicator
of "fear" \-- people flock to commodities like gold, silver, and real estate,
as well as to bonds, etc. when they don't believe the market is sound. Thus
gold's value rises during these times relative to paper currency, which
depresses the value of the stock market when priced in gold. During times of
hope/exuberance, the opposite occurs. People flee static investments for
dynamic ones. Who wants to own a lump of metal when the markets are hot?

There hasn't been a really big macroeconomic "growth story" since 1999, thus
this graph.

If the pattern continues, this graph argues the same thing. Given that this is
a repeating and established pattern, it's a much stronger argument than the
correlation in the original article up top. It argues that we have not yet
"hit bottom" in the current macro cycle and that one more crash of some sort
lies in the near future before the economy resets itself for the next growth
cycle.

(Argues, but does not prove, of course.)

~~~
lutusp
> but it definitely argues for some sort of pulsing macro business cycle.

Not really. Without an explanation, it's three bumps having no significance.
If you watched a sequence of coin toss outcomes, some heads, some tails, and
called the heads outcomes "market surges", you would see the same kind of
pattern, but without any real meaning.

Remember that to a scientist, the default assumption is not that an observed
pattern has significance, but that it doesn't -- it's called the "null
hypothesis".

There's a world of difference between describing a pattern, and explaining a
pattern.

More here: [http://arachnoid.com/randomness](http://arachnoid.com/randomness)

~~~
api
Don't repeating patterns increase the likelihood that the pattern is non-
random with each repetition?

If you saw a graph of coin flips that showed a clear sinusoidal pattern and
that pattern continued over many cycles, wouldn't it be reasonable to at least
suspect that the coin was not "fair"? One cycle, maybe not. Two, okay, I'm
slightly suspicious. Three, four, five?

Of course the pattern says nothing about causation, just that something is
biasing the output somehow.

I am not a statistician but I do have a fair amount of background in things
like information theory, and I find it very hard to believe that regularity
has zero significance. Plug that output into Shannon's equations and compare
it with a random source. Or doing VBR mp3 compression on /dev/urandom vs. a
piece of music.

The fooled by randomness argument can be taken too far. In a reductio ad
absurdium you could argue that I do not exist because theoretically a random
source could produce what I just typed. You would theoretically be correct. If
you output digits of pi long enough, they will contain this text.

~~~
lutusp
> Don't repeating patterns increase the likelihood that the pattern is non-
> random with each repetition?

1\. No, not for finite-length patterns anyway.

2\. Your question is deeper than it appears, and it alludes to some complex
theories about randomness.

Let's say I present a series of decimal digits that is a million digits long,
and I claim that they're random, in this context meaning they have no
exploitable internal order (i.e. have high entropy). If you understand the
risks in making assumptions about randomness, and in spite of all sorts of
apparent non-random sequences within the list, you might say, "the list isn't
long enough to draw any conclusion about randomness." And you would be right.

My million-digit list might actually be a sequence of digits of Pi starting at
some arbitrary point within Pi and extending for a million digits from that
point. The list appears random, but it isn't -- it actually has very low
entropy.

On that basis, guess how many digits you would need to be assured that they
represent a random sequence? Spoiler: an infinite number.

All the principles that apply to a claim of randomness, apply to a claim of
non-randomness, and for the same reasons.

> I am not a statistician but I do have a fair amount of background in things
> like information theory, and I find it very hard to believe that regularity
> has zero significance.

Okay. If I flip a fair, unbiased coin and record all the flips, counting heads
as 1 and tails as zero, over time I will see any number of apparently
significant patterns, and the longer the sequence, the more likely that I will
see "significance".

In a long sequence of flips of a fair coin, for any particular sequence of
length n to have >= 50% probability requires 2^n flips. For example, this
means after 256 flips, the chance for an uninterrupted sequence of 8 heads has
risen above 50%. Therein lies the problem -- with a large enough data set, you
will see all sorts of meaningless patterns.

The only way to sort this kind of thing out is to:

1\. Adopt the "null hypothesis" \-- meaning start out assuming that a
correlation means nothing, then gather evidence to contradict that assumption.
In other words, don't start out by assuming what you must prove.

2\. Consider alternative explanations for the tested outcome -- avoid
confirmation bias.

3\. Remember _lex parsimoniae_ , otherwise known as "Occam's razor", the
precept that the simplest explanation tends to be correct. And the simplest
explanation is that a pattern that lacks an explanation, also lacks
significance.

In the final analysis, one cannot make any reliable statement about a data
pattern without knowing how the sequence was generated, in other words the
result data ultimately has no meaning, only knowledge of the generating
function can offer that kind of significance.

> If you output digits of pi long enough, they will contain this text.

Yes, but that's an argument against the meaning of perceived patterns, not in
favor of it.

~~~
api
This gets really philosophically deep if you keep going... :)

Like... how do you bootstrap epistemology? Given what you say above, how is it
that a completely naive learner learns anything? If you immerse a naive
learning entity in random noise, it will only learn random correlations. But
if you immerse it in an environment with structure, we must assume it would
begin to mirror that structure in its internal state. (Learning is information
transfer.) But at some point it has to start somewhere... to start by
attempting to correlate one apparently non-random pattern with another.

BTW, I do agree that the graph I posted doesn't _prove_ anything. But if it
continues to repeat, at what point should we start questioning the null
hypothesis and searching for underlying causal factors? Does statistics have
anything to say about that?

This gets into areas like "if we built an autonomous space probe, how would we
program it to look for 'interesting' things? Define interesting..."

~~~
lutusp
> Given what you say above, how is it that a completely naive learner learns
> anything?

Well, that's a very good question, and I think the answer is by being naive,
meaning suspending disbelief until the person has enough experience to be an
informed consumer of ideas.

> If you immerse a naive learning entity in random noise, it will only learn
> random correlations.

That's true, but children are natural scientists, naturally curious,
predisposed to think there's a mechanism behind everything. If that instinct
succeeds, they will look for and sometimes find actual mechanisms -- where
they exist.

> But if you immerse it in an environment with structure, we must assume it
> would begin to mirror that structure in its internal state.

That's true even when the structure is an illusion, as with religion and fixed
belief systems. To me personally, the hardest part of growing up is not
discovering the real mechanisms of life, but unlearning the phony mechanisms
that we tend to be force-fed as children.

> But at some point it has to start somewhere... to start by attempting to
> correlate one apparently non-random pattern with another.

I would have said that the start is locating a plausible mechanism for a
pattern that might otherwise mean nothing, then proving a correlation. Then
offering the explanation to one's friends to see if they can find a flaw in
your reasoning. Hmm -- I just described about 80% of modern science. :)

> BTW, I do agree that the graph I posted doesn't prove anything. But if it
> continues to repeat, at what point should we start questioning the null
> hypothesis and searching for underlying causal factors? Does statistics have
> anything to say about that?

Yes, it does -- it's the same with all apparently nonrandom sequences. Unless
the observer tries to find and test explanations, the default assumption must
be that, no matter how persuasive, the data are random and lacking a cause-
effect relationship.

Here's my favorite example of what can go wrong. Let's say I'm a doctor and I
think I've cured the common cold. My cure is to shake a dried gourd over the
patient until he gets better. The cure might take several days but it always
works. It's repeatable. It's falsifiable (it might fail, but so far it
hasn't). Other laboratories successfully replicate the experiment. So it's
"scientific", at least according to the definition of science that doesn't
require things to be explained (as with psychology).

To a mature, skeptical mind, everything is wrong with it -- no attempt to
explain, confirmation bias, etc. But to someone starting out in life, to
someone not sufficiently skeptical, it's a scientific breakthrough. It's not
random. :)

------
ap22213
Someone told me that part of the reason for the great returns of the stock
market in 2013 was because of the fed's quantitative easing program. They said
that the easing was increasing the money supply, and that money has no where
else to go except into the stock market, because all other investments haven't
had great returns.

Is there any merit to that? I was planning to keep investing in stocks because
of that. But, really I know nothing.

~~~
swalsh
Warren Buffet has only a few basic rules. Amongst them is only invest in
things you understand. I think as a general rule, its a pretty good one.

~~~
ap22213
Unfortunately, I don't understand much. So, I just invest in S&P500.

~~~
enoch_r
By doing so, you'll beat the post-fee, ex ante performance of actively managed
mutual funds[0]. You're doing exactly the right thing--investing in broad-
based indices rather than trying to beat the market. As your time horizons get
shorter, you can move some money to bonds (treasuries, bond ETFs, etc.) to
decrease your risk (and reward).

[0]
[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021)

------
ergoproxy
Bear Stearns failed mid-March 2008. Despite this, on March 27, 2008 Mark
Hulbert gave serious weight to Richard Band's prediction of an "uptrend that
could carry the blue chip indexes to all-time highs by late 2008 or early
2009. Dow 16,000 here we come!" [http://www.marketwatch.com/story/dow-heading-
for-16000-richa...](http://www.marketwatch.com/story/dow-heading-
for-16000-richard-band-says)

And on April 18, 2008, Hulbert said "The Dow Theory appears poised to go on a
buy signal..." [http://www.marketwatch.com/story/dow-theory-poised-to-
trigge...](http://www.marketwatch.com/story/dow-theory-poised-to-trigger-a-
buy-signal)

Following this advice, you would have bought near the top of the market, when
what you really want to do is buy low and sell high...

Hulbert is probably the most knowledgeable student of DOW history. He knows
that what happens to the DOW in the short run is mostly meaningless noise. He
should take his own advice:

"Some psychological researchers, for example, have presented series of random
numbers to human subjects and then asked them whether there are any patterns
in the data. Overwhelmingly, the subjects claim to have detected patterns in
the data.

"We should keep this research in mind as we watch the stock market day in and
day out. We may think we have detected a pattern, but that doesn't mean that
it really exists."

Quoted from: Market Watch (April 3, 2007)
[http://www.marketwatch.com/story/dont-read-too-much-into-
sto...](http://www.marketwatch.com/story/dont-read-too-much-into-stock-
markets-first-quarter-results)

------
jdeisenberg
The y-axis tells the story. In 1928-29, the market lost about 45% of its value
(375 down to 200). If the pattern holds, the current market will go from about
16400 to 12400, which is 25% of its value. That's still bad, but not as bad as
1928-1929.

------
grandalf
This is very similar to the shape of the google trends graph of "fettucini".

------
mcguire
Crestmont Research Stock Matrix: [http://www.crestmontresearch.com/docs/Stock-
Matrix-Taxpayer-...](http://www.crestmontresearch.com/docs/Stock-Matrix-
Taxpayer-Real1-11x17.pdf)

Key and other versions: [http://www.crestmontresearch.com/stock-matrix-
options/](http://www.crestmontresearch.com/stock-matrix-options/)

113 years of stock market returns, adjusted for taxes, inflation, transaction
costs, etc. Plus extra bonus history.

------
edabobojr
I'm pretty skeptical of charts like this. On the y axis, the scales aren't
relative. The gain on the black line before the drop is about 187% (200 -
375). The gain on the red line is 132% (12400 - 16400). On the x axis, there
isn't even a label for red so it impossible to tell how the different time
periods compare.

------
redblacktree
Folks smarter than me: is it prudent to move my assets into cash for a couple
of months? Is there really anything to this?

~~~
davidw
The basic strategy that I've always seen outlined: put a bit each month into
an index fund. If the market tanks, that means you are buying low!

~~~
themoonbus
This is exactly the correct strategy.

------
theklub
I've seen that same chart applied to crypto currencies lately, seeing this now
just make me laugh.

------
dllthomas
The big question to my mind is how many other points there have been between
then and now where this chart would have fit at least as well.

------
hartator
If you look hard enough, you will always find correlation between stuff.

Never forget that's correlation doesn't imply causality!

~~~
dllthomas
Correlation does imply causality, but:

    
    
        1) it doesn't (alone) tell you what sort
        2) it takes quite a number of examples to be very certain of anything
        3) you have to be weighting counter-examples correctly, too
        4) you shouldn't forget your priors

------
hcarvalhoalves
Self-fulfilling prophecy?

