Lessons on Being Wrong

An open letter to investors, traders and pundits alike and a reminder to myself: Everybody will be wrong at some point or another. Markets are boss and will ultimately humble you. This is no business to be a “perma” anything. The temptation is to anthropomorphize markets and get stuck in a particular “camp”. Rather our focus should always be on how to figure out how to derive value from markets. Adapt or get run over and recognize when the environment changes.

And when I mean everybody will be wrong at some time I truly mean everybody, myself included.

I’ll give you a prominent example.

Following the corrections in 2015 and early 2016 markets expanded relentlessly on record global central bank intervention which went a long way to compress volatility as earnings recovered from the “earnings recession”.

The trend was as relentless as it became predictable. Seeing a coiled spring my expectation was for that volatility compression to end or at least get tested in 2017 with at least a 5%-10% corrective move to come.

I was totally wrong on that, all we got was a 3.5% pullback and the volatility compression kept on going and we ended up seeing the least volatile year in history:

While I ultimately ended up being correct about the coiled spring, my timing was off and any concerns about market breadth or internals didn’t matter. Artificial liquidity, be it central banks or the coming tax cut, ran over everything and markets proceeded to a blow-off top.

Here was my misplaced take in February 2017:

The time lag comedy bit at the end aside, my saving grace here perhaps was recognizing the technical possibility of a melt-up coming.

But needless to say 2017 was a tricky year as one had to keep chasing the non correcting ascent.

Now 2018 turned out to be a year for Wall Street to be wrong on everything. The year when the warning signs finally did matter, but they were ignored:

A perhaps similar script to 2008 when the warning signs then were ignored as well only to see the largest financial crisis in our lifetime unfold:

The big lesson for me here and I hope to everyone: Nobody has a crystal ball. Being wrong is ok, but you got to know when to stop being wrong and adapt to the environment at hand.

For me the epiphany in my own approach to markets and trading came in February 2018 following the initial 10% correction this year when I retired the bear/bull concept altogether.

I stated then: “Consider me neither bullish nor bearish, but simply practical. That’s my mantra and orientation forthwith. Oh don’t get me wrong, I’ll still analyze and point things out what I see from a macro and technical perspective (and there is plenty to be concerned about), but I’ll comment from a merely practical perch rooted in the desire to identify technical setups”.

It’s frankly the most useful stance to take in any environment. Identifying actionable trade setups is what matters. Whether they are long or short doesn’t matter. The rest is noise.

And this is where I encourage pundits to take on a more humble and practical stance as well. For example, it’s been painful to watch a smart guy like Tom Lee to keep doubling down on a bullish call during a 90% down move in Bitcoin telling everybody the bottom to be in every month in 2018 and then declaring the market is wrong. Who is served by this?

Or Wall Street famously upgrading stocks and indices near tops and then downgrade them 20-25% lower?  You may call it adapting Wall Street style, but who is served by this?

Hence I think year end targets are silly. Things change. Yes, one can make all kinds of forecasts and sometimes they are correct and sometimes they are wrong, but from a practical perch one has to recognize that nobody can predict the future. EVERYBODY will be wrong at some point or another.

Rather we all need to want to identify ebbs and flows and find a way to partake as we try to do on an ongoing basis calling it as we see it. Favoring downside as in Lying Highs when we see risk to the downside, or favoring upside as in Bear Trap when we see rallies coming even if they are short term. But above all be cognizant of the environment we’re in.

I don’t know the timing of when the bull market ends. It hasn’t yet, but it may also at any moment. For now we are in a complex corrective period, but no bull market lasts forever, that I am reasonably sure of, and currently markets are in stress and at risk of breaking their trend. The point here is not to point to doom and gloom, but to point to a changing investing and trading environment and to recognize when the bull trend is over, for when it is, things will change dramatically. Don’t forget: Even in bear markets there will be massive rallies and often these can be the most aggressive.

I repeat: The goal is not to be bullish or bearish. The goal is to be as realistic as possible in analyzing markets and identifying technical setups in either direction. And that is the biggest lesson on being wrong: Know when a setup is in your favor, know when it is invalid and move on. Rinse and repeat.

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Categories: Opinion

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